Fixing Housing Inflation Before the 8th Pay Commission

Context

1. The Union Cabinet recently approved the 8th Central Pay Commission (CPC) to review salaries and pensions of Central government employees.
2. Around the same time, the Ministry of Statistics and Programme Implementation (MoSPI) released a paper proposing major changes in how housing inflation is calculated in the Consumer Price Index (CPI).
3. This is important because errors in housing inflation measurement can distort India’s headline inflation data, especially after pay revisions.

What is Housing Inflation?

1. Housing inflation refers to the rise in rental costs or house prices over time, which is a major component of CPI inflation.
2. In India’s CPI basket, housing has a weight of 10.07%.
3. Currently, MoSPI surveys over 13,000 houses in 300 towns, including many government-provided homes.
4. For these, it uses the House Rent Allowance (HRA) foregone by employees to estimate rent – which is inaccurate because HRA depends on salary levels, not actual market rents.

Why is the Current Method Problematic?

1. HRA varies with the employee’s grade, not with market demand.
2. When salaries are revised (as they will be under the 8th CPC), HRA increases sharply, artificially pushing up housing inflation.
3. This happened after the 7th CPC (2017), when a 105% HRA hike made housing inflation shoot up from 7% to 8.45% within a year — even though actual rents didn’t rise.
4. As a result, headline CPI inflation also rose temporarily, misleading policymakers and investors.

Recent Data Trends and Global Comparisons

1. Between Q1 2024 and Q2 2025,
   1. CPI housing inflation averaged around 3%,
   2. RBI’s house price index showed 6–7% growth,
   3. MagicBricks rental index rose sharply to nearly 30%.
2. This gap shows CPI underestimates real housing costs compared to private market data.
3. Globally, most countries use market rental data for CPI, not allowances like HRA.

Proposed Changes by MoSPI

To fix distortions, MoSPI proposes three major reforms in the new CPI series (due February next year):

1. Exclude government-provided accommodations from housing inflation data.
2. Collect rental data monthly (instead of every six months).
3. Include rural housing inflation for the first time.

These steps aim to make CPI data more accurate and representative of actual rental trends.

Challenges and Way Forward

Conclusion

Accurate measurement of housing inflation is crucial as India prepares for the 8th Pay Commission. By excluding government housing and using real rental data, MoSPI’s reforms will ensure CPI reflects ground realities, helping policymakers, investors, and the RBI make better inflation and wage-related decisions.