As temperatures and fuel prices soar in our country, it’s hard to miss conversations and chatter about the rising costs of living and inflation rates. While the term inflation is thrown around casually in conversation by a lot of us, the truth is that most of us understand inflation the same way we understand the stock market– vaguely. However, it is important to know how inflation works because it has an impact not just on our everyday lives, but also our future.
What is Inflation?
Inflation refers to the increase in the prices of goods and services over time. Every time your grandparent or senior member of your family goes on an unsolicited rant about how gold cost Rs.3/gram when they were younger or how they had a full meal for 25 paise when they were children, they are talking about inflation. Inflation refers to reduced purchasing power, which is a technical way of saying that the same One Rupee that was capable of buying 4 full meals in the fifties can’t even get you 1/25thof a meal today.
What Causes Inflation?
There are three main causes to inflation.
The first is increased demand, where the demand for something is far greater than the supply or availability of it. For example, let’s assume that India had a terrible monsoon and a lot of crops died – this would mean that the food that’s available for distribution is lesser than the number of mouths that must be fed. The lack of availability might even push citizens into paying higher prices for the same product, leading to price rise. This is called Demand-Pull inflation.
The second reason that inflation occurs is when the country prints money excessively. If there’s too much printed money in circulation, it reduces the value of money, and as a result, prices are hiked.
The third reason why inflation occurs is when demand remains the same but there are problems with supply. This is particularly relevant in times of natural disasters. During the floods in Tamil Nadu, for example, a lot of roads were damaged, leading to problems with the supply of food and as a result, prices soared. This is called Cost-Pull inflation.
While it’s easy to explain inflation using these examples in a small level, the Inflation that happens in our country is a result of a combination of factors.
The Inflation Rate
India’s inflation rate is measured using the ‘Consumer Price Index’, where the change in prices of consumer goods, such as milk, footwear, clothing, wheat, rice, hospitalization, education and thousands of other such products and services are measured. The change in price of these goods over time, is inflation. It is important to note that when we say that the Inflation rate is 4.28%,it is an average. It does not mean milk prices and school fees will increase by the same 4% every year! Each category has its own rate of rise and fall.
What Does This Mean For Me?
Inflation is the most important consideration for your savings. Remember, women have higher life expectancy rates while also being prone to more medical complications with age. So, Rs. 2 lakhs might be enough for an emergency hospitalization today, but will it be enough in 5 years’ time? Rs. 25 lakhs might be enough for a higher education degree today, but will it be enough in 10 years’ time? It is extremely important to think about your savings with respect to inflation and see if you’re saving enough to cover for your future goals, because make no mistake, inflation will eat into the value of your savings. It is better to take cognizance and alter your plans while you are saving than to ignore it and find yourself coming short when it’s too late.