Inflation – a necessary evil
July 31, 2021One of the most common terms that we hear whenever we come across finance related news is ‘Inflation’. In fact, there is no topic in finance that is complete without this. Inflation has blended so well into our personal day to day life and activity; without us even realizing that. Let us take a look at a few cases.
- A person decides to buy a bike which is priced at Rs.80,000/- this month. He saves and makes the money in 2 years. While the person goes to buy the bike; he sees that the price has gone further up to Rs.1,00,000/-.
- There is a rising shortage of potatoes in the country. Demand for potatoes is more than the supply. People end up buying potatoes at a higher price.
- The price of diesel has gone up. Prices of transporting goods has risen parallelly. As a result, the price of commodities is higher for the common man .
- The prices of chemicals have risen up in the past one year. As a result, the overall cost of manufacturing medicines also rises. A consumer ends up purchasing the medicines at a higher price than last year.
- During this period of Corona pandemic; people have started buying sanitizers in larger amounts thereby increasing the demand. This can lead to price rise of the sanitizers.
Do you see a common trend in the above cases? There is a rise in price in each of these cases. The price never stays the same as it was back a year or two. An increase in demand as opposed to low supply of goods, an increase in production cost of products, excess circulation of money – all these can pave way to inflation. These lead to a steady rise in the prices of goods and commodities over the years. This is what we call “inflation”.
In India, the present inflation rate is 4.89% as compared to the inflation rate of 6.2% during 2020*. Inflation in India is measured by two indexes – Wholesale Price Index and Consumer Price Index. As the name indicates, these indices are measured on a wholesale and consumer level respectively. While inflation helps economy to a certain level by boosting consumer demand and consumption and reducing unemployment; it affects the purchasing power of a common man adversely. It can severely impact his/her savings, investments and retirement corpus. Now; you may be thinking the inverse effect i.e. deflation will be good. But the answer is ‘No’. A fall in prices can be beneficial to consumers initially as the prices have fallen. But in the long run, this can adversely affect the traders and increase unemployment rates and affect the economic development of the country as well.
So, who can control inflation? Usually, the central bank steps in to control the inflation in any country which in our case is the Reserve Bank of India. They may impose changes in fiscal and monetary policies and also control the money supply. From a common man perspective, we can spend wisely by curbing unnecessary expenses, borrow money when it is absolutely necessary and increasing our savings by planned investments. Inflation can be tackled to some extent by investing money instead of just stashing money in our accounts.
However, inflation can also cause the investments to have a negative rate of return. Rate of return is the amount an investment gains (or loses) over a period of time. When an investment loses its value over the period of time, it becomes a negative rate of return. Over a period of time, this can turn to a positive rate of return. So, we need to do a proper research and plan our investments properly in order to avoid negative Rate of return. Let us plan and spend wisely and tackle inflation.
* Source of Information: https://www.statista.com/statistics/271322/inflation-rate-in-india/