Inflation ... an overview(Caution)

The rate of rise of inflation is very scary...

  The prices of milk, sugar and ghee have gone up considerably. That too especially during festival days You would have felt the pinch. Life has not been very easy this year due to the rising inflation. On mahalaya ammavasya day, 1 banana leaf was 5 Rupees, I can recollect, that 10 years back I had bought 1 banana leaf for 10 paise. The rate of raise of inflation is sky rocketing than real estate prices.

   The Reserve Bank of India has been raising key rates to tame inflation. The wholesale price index (WPI), consumer price index (CPI) or food inflation are different facets of this simple economic indicator known as inflation.

Inflation reflects the value of money. 

For example, if tomatoes were priced at 30 per kilo last year, and this year it is at 32, the inflation comes to about 6.66%. It may sound reasonable. But it is on a high base of 30 per kg.

Impact on common man..(Salaried)

  In overall the demand for basic necessities like food is inelastic to any price rise. Hence, if food prices go up, it would eat into cash reserve or monthly savings for the budgeted families, as you cannot cut down on such needs beyond a point.

Inflation and Investments

Always consider inflation into account while making investment decisions and calculating returns.

On investments, you have to compute the real rate of return to assess the impact of inflation. Fixed deposits, PPF or NSC bonds assure safe returns but are not capable of beating inflation.
Inflation simply erodes the value of our investment.

Let us assume you invested 1,000 in a one-year fixed deposit at a rate of 7%.
The value of the deposit would be 1,070 after a year. But if inflation is 8% during the year, then the value of 1,000 will reduce by 80.
The net value of your money will be 990 only. So the net gain, after considering the loss of value due to inflation, is actually negative. Whenever you invest in an instrument, compute the future value after accounting for inflation of 8-10% to get accurate results.

Note:  Consider inflation for any retirement plans especially non-pensioners (Like me!!).