Inflation: The Silent Killer Of Your Finances

For most of us, rising prices of everything we need and want is a painful reality. Every few months we see prices going up, and after a few minutes of complaining about this increasing ‘menghai’ we accept it and move on.

However, these price hikes over a period of time severely dent our purchasing power and reduce the value of our money. For instance, in 1985, a 500 gms pack of butter used to cost Rs. 6.50. Today, the same packet costs Rs. 235. And when Sholay was released in August 1975, ticket prices ranged between Rs 3.50 and Rs 5.50 in Mumbai and Delhi. Today, you would have had to pay around Rs. 500. The increase in the first case is 200% and in the second, it is around 500%.

The word used to describe this increase is Inflation.

But, what does the term inflation actually mean, how does it affect our purchasing power and reduces the value of money? More importantly, what should we do to beat inflation? In this blog, we will talk about everything related to inflation.

First, let’s understand what inflation is.

The prices of goods and services of daily use like food, clothes, transport, rent, recreation, etc. increase over a period of time and this increase is called Inflation. Inflation is the reason for which we can buy less for the same amount of money.

For example, if you had Rs 100 in 1985, you could have bought 12.5 liters of petrol with it. With the same amount of money, you could have bought 2 liters of petrol in 2007. Meanwhile, with Rs 100, today you can buy only a little more than a liter of petrol. That is how the same Rs 100 lost its value over time due to inflation.

. Let’s look at the table below to understand how the prices of different goods have increased over a period of time due to inflation.

The inflation rate you hear in the news is not what you experience in daily life

In the Indian context, the average inflation rate as per the numbers released by the government in the country is 5–6% . But over the years the price rise for all goods and services has been much higher than that. For example, the maximum fare for Delhi metro rail was Rs 30 in 2012, today it’s Rs 60 per trip, a steep 100% hike in 8 years, i.e. 12.5% year-on-year.

So why is the inflation we experience different from the official numbers of the government? The answer is the way inflation is calculated by the government. Let’s look at this in detail.

Inflation Rate calculated by the government is a Weighted Average

The CPI, ie the consumer price index, and the WPI, ie the whole price index, are the two indices to measure inflation by the government and that is the number we get to hear in the news.

The CPI is the weighted average of the price change of a basket of products and services like food, apparel, electronics, transportation, healthcare, education, housing, etc. It is the index to measure retail inflation. Meanwhile, WPI measures the price changes in goods sold by one business in bulk to another in the wholesale market. In 2013, India switched from WPI to CPI as the main measure of inflation.

Now, this weighted average means that the individual products and services might be increasing at a way faster rate. Here’s some data to prove it.

(The inflation rates in India ranged between 2012 and 2020 as per the government)

As per the Ministry of Statistics and Programme Implementation, the current inflation rate in India is 6.93%. In the last 9 years, though the average inflation rate has remained at 5 to 6%, it peaked at 12.2% in 2013, while the lowest point was 1.5% in 2017.

Now, let’s compare the inflation rates for different goods and services with the inflation rate

As you can see, the food inflation rate has been around 9.62%, healthcare costs are going up by an average 8%, and education costs are increasing by 10% in the last few years.

Want to prevent the loss of value of our money: Invest not save

To prevent the loss of your money, saving is not enough. That’s because most saving instruments like saving bank accounts or PPF give returns that don’t beat inflation consistently over a long duration. So when you invest in them, you might grow the corpus but the purchasing power of that money will be lower.

Let’s take an example. Suppose you have some money and you want to put it away for 15 years for your children’s education. Now today a B.Tech course costs around Rs. 10 lakh and for simplicity, we assume you have the exact same amount. And you put that money in PPF. Now at the end of 15 years, you will have Rs. 27.59 lakhs (at current PPF rate of 7.1%). But the cost of that same B.Tech Course will be Rs. 41.77 lakh at that time because its cost is going up by 10% every year.

Did you see what happened here? You today have the money that can fulfill a goal but if it doesn’t grow faster or at least at the same rate at inflation then in the future it will not be enough for that very same goal.

So, don’t save. Invest in the asset class that can beat inflation over the long term and investing in equities through mutual funds is the best way to achieve this.

Bottom Line:

If the returns are below the inflation rate, then every minute you save money is another minute inflation is eating your money away, and the time and effort you spent to earn it. So to beat inflation it is important to invest in a tool that will be able to beat inflation over time.

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