We all have at least heard our parents say this once ” Bohot Mehengai ho Gayi h.” But have you ever given a thought as to why they say this? Let me tell you why.
Incomes and expenses in the past were tremendously different from what they are today.
There was a time when the petrol price was 30 paisa, and a flight ticket from Mumbai to Delhi cost around ₹140? At the time of independence, even the rate of 10 grams of gold was as low as ₹88. Unbelievable!!
But today we know that even onion prices beat the rate of 10 grams of gold in 1947. Looks unfair right?
But it wasn’t just the costs that went up, the salaries of employees also increased alongside.
A senior central government official took home a salary of ₹2000 p.m; around independence. The salary of an officer in the same role today is ₹2.5 lakh p.m
So the question comes, how do prices rise so high? Let’s find out.
What Is Inflation?: In India Overview
The economywide increase in the prices of goods and services over time is called inflation.
Inflation diminishes the purchasing power of money, which is why ₹140 could purchase a plane ticket 60 years ago but isn’t even sufficient to buy a decent movie ticket today.
- Measuring Inflation
Inflation is calculated on wholesale goods as well as consumer goods. The Consumer Price index (CPI) tracks the prices of goods consumed by households and determines the inflation rate.
But let us not delve into details of its mathematics.
Just know that the average prices of goods today are compared with its historical prices (quantity remains constant). This difference, along with other factors, will tell us the rate of inflation in the country.
Causes of Inflation in India
Many factors contribute to inflation; however, the two significant aspects of being looked into are:
- Cost-push Inflation – In this case, the cost of production increases due to an increase in the cost of raw materials, a hike in wages, or an increase in fuel prices that drive up the prices of goods resulting in inflation.
- Demand-pull Inflation – When the economy grows, more employment is created. This results in demand for workforce and, in turn, an increase in salaries. Higher wages means a higher rate of spending and higher inflation.
But why is inflation such a problem when the income and prices increase simultaneously?
Inflation & Your Investments
The real problem is that though income and prices do increase over time, they do not grow at the same rate.
In Hungary, in the year 1941, inflation reached 1,50,000% a day.
That means an apple that cost you 10paisa on Monday would have cost ₹150 on Tuesday.
Now imagine, if you lived during that time and had all your money saved or stashed under your mattress, your money value would be wiped out in a single day.
While such occurrences are relatively rare, the rate of inflation keeps changing from time to time.
And the only escape from this inflation trap is investing. To battle inflation, the ideal thing is to start investing. Inflation can be both good and bad, depending on where you invest.
There are multiple investing vehicles, Let us say you have invested in Fixed Income assets such as FDs/RDs for a return of ~7.5% p.a for ten years. The returns after tax would be ~5.5%, while the average inflation rate for the past ten years is ~6%. Your money value would have diminished by 0.5%.
While when you invest in inflation hedges like Real Estate, Equities, Gold and Cryptocurrencies, they have the potential to give returns that far exceed the inflation rate.
Reports suggest that global companies are now investing in Bitcoin as a hedge against inflation in fiat currency. In the last decade, gold- a prevalent inflation risk indexed asset, saw a ~42% rise in its value. In contrast, the value of the cryptocurrency has increased many million folds in the same period.
The fact that cryptocurrencies have shown promising returns in the past decade and its supply is limited ensures that it could hold value even if currency value diminishes.
But little thing to note here would be:
All of these vehicles carry some degree of risks and while F.D’s and R.D’s are the safest, vehicles like Equities and Crypto are on the riskier side.
But that doesn’t mean you should completely stay away from some investments and invest heavily on some because they meet your objectives of either profits or safety. All it means is that you should diversify your investments in varied mediums so as to balance the risks to returns ratio in your portfolio and successfully tackle inflation.
The government is continually striving to keep inflation under control.
Still, it is a force that is impossible to avoid altogether. By planning ahead of time and putting a sound investment strategy in place, you might be able to minimize the blow of inflation on your savings.
Don’t let the inflation monster get to you; start investing today.
[su_note] KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing. [/su_note]
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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