Manu Nedunkandathil, CFP
Updated: Aug 20, 2021
The English Oxford dictionary describes inflation as a general increase in prices and a fall in the purchasing value of money. Let us understand what it means to us.
Inflation affects households in a silent but deadly way. The year-on-year increase in general price levels devalues money. For example, assuming yearly inflation of 6%, Rs. 100/- today will be only worth Rs. 94/- one year hence. Or in other words, if, a family's monthly average cost of living is Rs. 50,000/-, one year down the line the same will inflate to Rs. 53,000/-. Assuming no change in lifestyle, in the next 12 years, the expenses will double to Rs. 1,00,000/- per month and in further 12 years the expenses per month will inflate by 4 times to approximately Rs. 2,00,000/- per month.
Many of today's middle age group, those who were born in the '70s will remember eating candies for 1 paisa or ice cream for 10 paise. Today, one cannot even see the paisa in circulation, let alone imagine such prices. Let us go down memory lane to understand inflation better.
A few examples
35 years ago a 500 gms packet of Amul Butter was costing approximately Rs. 6.50. Today it costs around Rs. 225/-. The cost has increased at the rate of 10.66% per annum.
Some 40 years ago, one could have watched the latest flick in a theatre for just Rs. 3/-, today the same may cost you upwards of Rs. 200/-. An annualised growth of 11%.
30 years ago the cost of Maruti 800 was approximately Rs. 60,000/-, today the same will cost upwards of Rs. 2,50,000/-. An annualised growth of approximately 5%.
50 years ago a bottle of coke was approximately 5 paisa, today the same is Rs. 37/-. An annualised growth of 14%.
Let us look at historical inflation in India. The following chart shows inflation from 1971-72 to 2016-17.
Source: Department of Public Enterprises & https://dbie.rbi.org.in/DBIE/dbie.rbi?site=home
The average inflation between 1972-73 till 2017-17 has been roughly around 8.15% with peak inflation in the year 1974-75 of 26.80% and least inflation in the year 1976-77 of -3.83%.
The above illustrations have made it clear how inflation eats into our wealth. Inflation is like a termite. Termite steadily but silently eats the wood/ furniture making it hollow from inside reducing its weight and strength. Similarly, inflation is the silent killer, which eats into our wealth and reduces its worth over a period of time.
For a growing economy like India, inflation is here to stay. But the bigger question is, are you prepared for the same????...