Post 10 - Inflation-adjusted Rate of Return

Once all your finances are tracked digitally, the logical next step is to ask questions of the data. If you invest regularly, the most common question would be: What is the return on those investments? There are two kinds of returns: nominal return and real return. Nominal return is easy to calculate: ((Current value) - (Original value)) / (Original value). Converting this number into a fictional “annual” rate (CAGR) and comparing it against other assets that promise fixed annual returns (such as time deposits) is useful too. The other type of return that can be calculated is the real return, or the inflation-adjusted rate of return. This gives a better picture over a longer time horizon, when the underlying cost of things is likely to change significantly. In my opinion, one should not obsess over the precise numbers (unless they are very bad, in which case you absolutely should obsess over the numbers). Rather, focus on the process: make it easy to bring data in, take data out, and analyze the data. This post is about how I found inflation data for India, which I intend to use to calculate inflation-adjusted returns.

Disclaimer: This post is not financial or investment advice.

Inflation simplifies everything that is happening in an economy, i.e. the economic actions of millions of people, into a single number. The year-on-year inflation in India in August 2025 was 2.46%.1 Does this mean that everything is 2.46% more expensive? No. It means that the basket of items that make up the average household in all of India got 2.46% more expensive compared to last year. The things in your basket are probably completely different from the things in the average basket. The concept is abstract, so the numbers are not directly applicable in any sense. But they do indicate that things are getting more expensive in a very general sort of way.

In India, Inflation is calculated using the Consumer Price Index (CPI). CPI is a weighted average. CPI represents the cost of buying a basket containing all the items that a household will buy during a year, against a reference year. CPI is an “index”, so, it has no units. In India, the reference year is 2012 and the CPI value for 2012 is set at 100. So, whatever the cost of the basket was in 2012 was set to 100 and this is what the cost will be compared to in future years. In January 2013, CPI was 104 in Urban India: So, the basket was 4% more expensive compared to the previous year.2 … and so on.

Weighted averages seem to be the only statistical tool being used here. The process looks like it has two major steps:

First, calculate the cost of the basket in the reference year:

  1. Consumer Expenditure Survey (CES): Survey many households across rural and urban parts of each state and find out how much they are spending on a variety of items
  2. Item selection: Select a set of items from the CES which will make up the CPI basket
  3. Weight Reference Year: Use data from the CES to calculate the weight of each of the selected items in the CPI basket
    1. Repeat for the rural and urban parts of each state
  4. Price Reference Year: In each state, select many villages. Select markets in these villages. Find the price of all items that were selected in (2). Use a mean of these prices as the price of an item in rural parts of the state.
    1. Repeat for rural and urban parts of each state
  5. Calculate the base basket cost: Using the list of items selected (2), the price of each item in (2), and the weight surveyed in (3), calculate the base price of the basket.
    1. Repeat for rural and urban parts of each state
    2. This is the value which will be indexed to 100

Combined CPI is a weighted average of the Rural and Urban CPI, with different weights for each state, depending on how much of the spending comes from rural and urban areas.3

Have you had a sufficient amount of weighted average math and summation formulas?

(I have not gone into the calculation of the headline number, which is usually reported in the news: “All India” CPI for rural, urban, and combined. This is because the process seems to be different for rural/urban and combined, and I need more time to look into this.4


The weights5 were set in 2015 based on a 2011-12 survey of an urban and rural household’s monthly average expenditure.6 The weights suggest some patterns, but they have to be taken for granted as “inputs” to the model. For instance, the sub-group “Fruits” accounts for 10% of Urban CPI and 6% of the Rural CPI.7 These weights are unlikely to match any actual household’s consumption patterns, because they are geometric means of all the households surveyed.

There is a bunch more complexity in the calculation of the final CPI. I have questions such as:

  1. Where does the price of a fruit come from? What if the fruit is not in season?
  2. If it is a shop, is it the same shop each time? What if the shop closes?
  3. What if the item is replaced with another item? For instance, 6.1.06.1.1.02.X: toothpaste, toothbrush, comb, etc. seems like a composite item which includes every brand of toothpaste and toothbrush. How?
  4. There are 300 items8 in the table and the cost of each of these items is required to calculate CPI. Who goes and finds the price of all the items?
  5. … so on.

Almost all of these questions are answered in CPI: Changes in the Revised Series but that is 80 pages long and I have only gotten about 25% of the way through it. So, I will look forward to reading the rest later. For now, pushing all of those questions to the back of my mind, I can still convince myself that I should rely on the All India CPI (Combined) (i.e. the headline inflation number) for these reasons:

  1. It is the only way that I know of to simplify a complex system which is beyond comprehension
  2. Something is better than nothing!

Now that we know how we arrive at the All India CPI (Combined)9, let’s get to using this number:

CPI is released monthly. It denotes the price of one basket of goods during the previous month.

  1. Number of baskets I can buy today
    • (Current basket count) = (Current investment value) / (Latest month CPI)
  2. Number of baskets I could have bought before investing
    • (Original basket count) = (Original investment value) / (CPI for the month of investment)
  3. Real return
    • = (Current basket count) / (Original basket count) - 1

The real return is a percentage. If your investment strategy has managed to beat inflation, then the real return will be positive. If not, it will be 0 or negative. If we have the monthly value of our investments, then it is possible to calculate the real return on a monthly basis and watch the trend: This would be particularly useful: If the current value is negative, and it has stayed below 0 for the past 4 years, you should do something. If the current value is negative but it was positive for most of the previous year, you are probably OK. (Not investment advice!)

This works for a single investment, which has not been redeemed in part, or increased, during the intervening time. Investment patterns rarely work like that: We would need to use the Internal Rate of Return (IRR). IRR is another confusing concept; I don’t fully understand the math behind it yet, so I have shied away from using it. With irregular cashflows in and out, IRR is the recommended metric though. Nominal IRR is easy to calculate using a tool such as Ledger or a spreadsheet program. Using CPI, I could reduce everything to the base year’s prices (2012 prices) and then, use IRR to calculate the Real IRR.

  1. Source: Press Release:Press Information Bureau 

  2. Source: Current CPI series with base 2012 = 100. 

  3. Table 3 in https://cpi.mospi.gov.in/PDFile/CPI-Changes_in_the_Revised_Series.pdf 

  4. See Annexure-III and Annexure-IV. Please e-mail me know if you understand it all! https://cpi.mospi.gov.in/PDFile/CPI-Changes_in_the_Revised_Series.pdf 

  5. Source: All India Item Combined Weight Base:2012 

  6. “Weighing diagram gives the share of each item in the total consumption expenditure in a CES. The weighing diagrams for the CPI series (Base 2012=100) have been derived on the basis of average monthly consumer expenditure of an urban/rural household obtained from MMRP data of NSS 68th round Consumer Expenditure Survey (2011-12).” Source: https://cpi.mospi.gov.in/PDFile/CPI-Changes_in_the_Revised_Series.pdf 

  7. Table 6 in https://cpi.mospi.gov.in/PDFile/CPI-Changes_in_the_Revised_Series.pdf 

  8. Annexure III in https://cpi.mospi.gov.in/PDFile/CPI-Changes_in_the_Revised_Series.pdf 

  9. I am joking: We have skipped most of the useful parts.