For most of us, the 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 this term inflation actually mean? Why is inflation bad for your finances? What are the disadvantages of inflation? How does it affect your purchasing power and reduces the value of money? More importantly, what should you do to beat inflation? In this blog, we will talk about everything related to inflation.
What Is Inflation?
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. It is the reason for which we can buy less for the same amount of money.
Let us understand with an example why inflation is bad. Suppose 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 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.
| Price Changes Due To Inflation | ||||
| Items | Price in 1985 | Price in 2007 | Price in 2021 | Average Inflation rate |
| Colgate toothpaste | ₹8 | ₹50 | ₹124 | 8.7% |
| Hamam Soap | ₹3 | ₹12 | ₹35 | 9.1% |
| Petrol | ₹8 | ₹49 | ₹100 | 7.3% |
| Gas cylinder | ₹56 | ₹300 | ₹830 | 7.8% |
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 9 years, i.e. 8.01% year-on-year.
So why is the inflation we experience different from the official numbers of the government? The answer is the way it is calculated by the government. Let’s look at this in detail.
How Inflation Rate Is Calculated In India?
The CPI, i.e. the consumer price index, and the WPI, i.e. 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 2021 as per the government)
As per the Ministry of Statistics and Program Implementation, the current inflation rate in India is 6.3%. 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.
| Increase in inflation rate between 2012 and 2020 for different essential goods and services | |
| Essential goods and services | Inflation rate |
| Food | 9.62% |
| Household utility items (Gas, electricity, telephone etc.) | 155% |
| Education | 10% |
| Healthcare | 8% |
| Transportation | 138 % |
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.
How To Beat Inflation With Investments?
To prevent the loss of your money, saving is not enough. That’s because most saving instruments like saving bank accounts orPPFgive 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.
| Fees for B.Tech Course (current) | ₹10 lakh |
| Rate of Inflation in education | 10% |
| Fees for B.Tech Course after 15 years | ₹41.77 lakh |
| Amount invested in PPF | ₹10 lakh |
| Current rate of interest rate for PPF | 7.1% |
| Total corpus after 15 years | ₹27.59 lakh |
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 throughmutual fundsis the best way to achieve this.
Bottom Line
If you do not invest, then you are essentially allowing inflation to take away your hard-earned money from you. The value of your money is decreasing every minute and you are doing nothing about it. This is why it is crucial to invest in products like Mutual Funds that can beat inflation with a good margin.
I've spent years delving into economics, particularly the intricate dance between inflation and its impact on purchasing power. The evidence is abundant and multifaceted, painting a clear picture of how inflation erodes the value of money over time.
Inflation is a fundamental economic concept, often experienced as a gradual increase in the prices of goods and services. This rise diminishes what our money can buy, leading to a reduction in purchasing power. The article rightly highlights the exponential growth in prices over the years, citing examples of a pack of butter or movie ticket prices, showcasing how a certain amount of money has lost its value through time.
The crux lies in understanding why inflation is detrimental. As prices surge, the same amount of money buys fewer goods or services. For instance, if in 1985, Rs. 100 could purchase 12.5 liters of petrol, by 2007, it only afforded 2 liters. Presently, that same amount can barely buy a liter, showcasing the diminishing value of money due to inflation.
To gauge inflation's impact, the article presents a table showcasing the steep price hikes of various essentials over time, such as toothpaste, soap, petrol, and gas cylinders. This substantiates the concept, illustrating how everyday items have become more expensive over the years.
There's a discrepancy between the official inflation rates released by the government and the inflation experienced in daily life. The government measures inflation through the Consumer Price Index (CPI) and the Wholesale Price Index (WPI). The CPI calculates retail inflation by weighing the average price change of a basket of products and services, while the WPI monitors price changes in goods at wholesale. This method might not capture the faster individual rates of certain products and services, leading to a difference in perceived inflation rates.
In India, the official inflation rate has averaged around 5-6%, but specific goods and services have experienced much higher rates, as highlighted in the article. Essential items like food, household utilities, education, healthcare, and transportation have seen considerable inflation rates, significantly outpacing the general inflation figures.
To combat the erosion of wealth caused by inflation, the article suggests investing wisely rather than relying solely on savings. Savings instruments like bank accounts or Public Provident Fund (PPF) might not consistently outperform inflation rates. The article's example of investing in PPF for a future educational expense demonstrates how even with substantial growth, the purchasing power might fall short due to higher inflation rates in education.
Therefore, the recommendation is to invest in assets that can outpace inflation over the long term, with mutual funds, particularly in equities, emerging as a viable option. Mutual funds can potentially beat inflation and safeguard the value of money against its erosive effects.
In conclusion, the article emphasizes the necessity of investing in avenues that outperform inflation to safeguard one's financial future, highlighting the critical role played by informed investment strategies in combating the adverse effects of inflation.
