Beating Inflation Blues

In modern financial circles, nothing perhaps has captured popular perception more than inflation. The media writes about it, policy makers blame each other for it; most of civil society suffers in silence. The vast majority of us are adversely affected by rising food prices and mounting fuel costs.

Though in an economy no-one can escape the effect of inflation, arguably, retirees are the worst-hit of all the groups of people. Inflation wrecks their world, messes up their estimates and forces them to live more frugally.

A big mistake in financial planning, therefore, is failure to take into account the impact of inflationary pressures.

We can begin our attempt to define inflation by referring to rising prices, as measured by price indices, wholesale and consumer included. In simple terms, inflation is the rate of increase in the level of prices for goods and services, a phenomenon that impacts the purchasing power of money.

Inflation is somewhat like rust. It is barely perceived at first. Ultimately, however, it decays. In this case, the decay eats away your savings. The resources you intend to invest need to expand by at least the rate of inflation just to make sure that the purchasing power in your should not fall.

Here is a likely scenario. Imagine a market characterized by 4% inflation. It may not appear to be a big issue on the face of it. Yet, in just a decade, the purchasing power of Rs 1,000 will fall to a little less than Rs 675/-.

Another way of putting it is assuming that the current rate of inflation is 4%. The items you had purchased last year for Rs 100/- will cost you Rs 104/- this year. Next year, these will cost you Rs 108.16, and in ten years, over Rs 148/-.

Inflation: Contemporary Indian Scenario

The Wholesale Price Index (WPI), which is available on a weekly basis, continues to be the most popular measure of headline inflation in India. There are, however, four Consumer Price Indices (CPIs) that are specific to different groups of consumers.

Estimating inflation

A fairly common approach is to apply a flat rate to estimate future spending. Yet, prices do not rise at the same rate, uniformly over a period of time. Take, for instance, a phenomenon that has been commented on by various sections in recent days. We are referring to decline in prices of certain items – audio equipment, television, long-distance telephone call etc. However, check out the price index for the periods when a few commodities have become cheaper. Chances are that the overall price index has moved up during these periods.