Inflation: how it is measured and why it differs from yours

Official inflation and felt inflation diverge for almost everyone, and both figures are correct. The gap is explained by methodology, not by manipulation.

What is measured

The consumer price index is the change in the cost of a fixed set of goods and services, weighted to reflect the spending of an average household.

{{figure:inflation-basket|caption=Your personal inflation differs from the official figure by exactly as much as your spending differs from the basket}}

Where the gap comes from

Three reasons, all of them structural.

Weights. For someone renting a home, rent takes a larger share of spending than average, so rising rents are felt more sharply than the index shows.

Substitution. The methodology partly accounts for people switching to another good when one gets expensive. That feels like a decline in quality of life while appearing in the index as no price growth at all.

Attention. We notice the things we buy often getting dearer and miss the stability of what we buy rarely. Bread went up — noticed; electronics got cheaper — not.

Core inflation

A separate measure excludes the most volatile components — food and fuel. It describes daily life less well and the underlying trend better, which is why the regulator watches it more closely.

Why an investor should care

Inflation is the bar below which income is not income: Real return: how much actually remained. And it is the main input into the rate decision: The key rate: how a Bank of Russia decision reaches your portfolio.

Instruments with inflation protection form a separate class — Inflation-protected bonds: how the principal is restated.