How Gold is misleading India's inflation data. Exploring how it affects India's true economic picture.
- Kiran S N
- Jun 30
- 2 min read
India's inflation numbers in May 2025 certainly made headlines, hitting a remarkable six-year low with the headline Consumer Price Index (CPI) inflation at just 2.82%. That sounds like great news, right?
Delve a little deeper, and you'll find a surprising twist: gold, despite its seemingly minor presence in the index, ended up disproportionately skewing India’s core inflation. Let's unpack how this happened.
What is Core CPI?
Think of Core CPI as the inflation measure that strips out the 'noise.' It specifically excludes two highly volatile components:
Food & Beverages (which has a hefty weight of 45.86%)
Fuel & Light (weighing in at 6.84%)
What's left is a 'core' basket that makes up 47.3% of the total CPI. This core measure is generally considered a more stable indicator of underlying price pressures, and it's something the Reserve Bank of India (RBI) watches very closely when making crucial monetary policy decisions.
May 2025's Official Snapshot
Let's look at the official figures for May 2025:
Headline CPI inflation: 2.82%
Food inflation: 1.5%
Fuel & Light inflation: 2.78%
When you calculate Core CPI by excluding food and fuel based on official weights, you arrive at a figure of 4.2%.
Gold's Unexpected Role in Core Inflation
Here's where it gets interesting: gold is tucked away in the CPI sub-category called "Personal Care and Effects," holding a tiny weight of just ~2% in the overall CPI basket. Yet, in May 2025, gold prices soared dramatically by 32.0% year-on-year, according to data from the Ministry of Statistics and Programme Implementation (MoSPI).
To quantify gold's impact on core CPI, we ran the numbers. By isolating gold's contribution, the calculation reveals something significant:
Core CPI excluding gold = 3.54%
Conclusion: A 57 Basis Point Distortion
Despite its small 2% weight, gold's extraordinary 32% inflation rate effectively inflated the reported core CPI by approximately 0.57 percentage points (or 57 basis points).
This means:
The true underlying core inflation (excluding gold) was closer to 3.54%.
The reported core inflation (including gold) was 4.2%.
The Big Policy Implication
Gold’s 32% inflation in May significantly inflated core CPI, creating an unnecessary distortion. While high core inflation is often seen as a sign of economic vibrancy, the sharp rise in gold prices here actually misrepresents actual demand-driven pressures in the economy. This could potentially mislead policymakers into making decisions based on inaccurate signals. Whether or not gold should truly be included in core inflation calculations is still a significant cause of debate among economists and policymakers. Agencies like CRISIL, for instance, have long argued for its exclusion to better reflect genuine domestic price trends, an argument that this analysis strongly supports with clear, data-backed evidence.
Disclaimer: Please note, this analysis strictly presents factual data and trends, without taking a stance for or against any particular viewpoint. We were inspired to delve into this topic by recent analyses from CRISIL.
Want to read more?
Subscribe to finsightsbysquareleague.com to keep reading this exclusive post.
