What is inflation

Technically, Inflation is the rate at which prices rise over time. In simpler terms, the ₹10 samosa you buy today could cost ₹15 tomorrow and ₹20 the day after. That’s inflation at work—like magic, but not the fun kind.

Why does inflation happen

Cost of Production: When production costs rise, companies charge more. If the price of potatoes and oil for your samosa increases, so does the price of the samosa itself. Similarly, if the shop’s rent goes up or wages rise, you’ll end up paying more for the same samosa.

Demand and Supply: Inflation also occurs when demand outpaces supply. For instance, ticket prices for an India-Pakistan cricket match soar due to high demand.

Government Policies: It's a bit complicated and beyond the scope of this post. However, if the Reserve Bank of India (RBI) decides to print more money, or change the interest rates on loan and deposits, it effects inflation.

For instance, during COVID-19, RBI lowered interest rates to encourage borrowing and indirectly leading to spend more since you now have more money in your account.

Global Factors: International events like rising oil prices or supply chain disruptions can also influence inflation in India.

How is inflation measured

Now that you know what inflation is, let’s take a look at how inflation is actually measured.

  • Consumer Price Index (CPI): This is the most commonly used measure of inflation. It tracks price changes in a basket of goods and services that a typical household buys—groceries, housing, transport, and more. If the CPI shows a 5% increase, it means that, on average, prices have risen by 5%. Your chai, samosa, rent—everything just got 5% more expensive.
  • Wholesale Price Index (WPI): This tracks inflation at the wholesale level before goods reach consumers. It measures price changes before goods hit the retail shelves. Think of it as the “pre-samosa” stage. WPI focuses mainly on goods, like: Manufactured Products: Processed goods like clothes, machines, etc.

How does inflation affect you

  • Your Salary: Inflation often means you’ll need an increment to maintain your standard of living. A salary hike of 5% might feel great, but if inflation is 6%, you’re actually losing out as inflation will increase your expenses more than in comparison to your salary increment
  • Savings: Imagine you kept ₹20 under your pillow to buy a Samosa tomorrow and that ₹20 slips under your bed. Now next year on Diwali, while cleaning the house you find your old ₹20 note , you would be delighted, however you will also be sad to find out that your money will not be able to buy your favorite Samosa because now the Samosa costs ₹21 (5% inflation on ₹20 makes the cost increase by 5% i.e. ₹1). Therefore its always emphasized to invest money and keep lower amount of cash.
  • Investments: Therefore it’s always important to maintain a healthy diversied portfolio that gives you a return higher than the inflation rate.

How to Beat Inflation?

1. Invest Wisely: Keep your money growing by investing in inflation-beating assets

2. Diversify Your Portfolio: Don’t put all your eggs in one basket. Spread your investments across different assets to protect your wealth.

Conclusion

Inflation is like that uninvited guest who shows up and refuses to leave. It is unavoidable. Inflation might not seem urgent today, but over time, it can significantly impact your financial future. So, keep an eye on it, plan your finances wisely, and maybe, next time your Samosa price goes up, you’ll know exactly why!

Read More

  • https://www.statista.com/statistics/271322/inflation-rate-in-india/
  • https://economictimes.indiatimes.com/news/economy/indicators/rbi-monetary-policy-rbi-leaves-inflation-projection-for-fy25-unchanged-at-4-5/articleshow/112363482.cms?from=mdr
  • https://www.forbesindia.com/article/explainers/inflation-rate-india/85983/1
  • https://pib.gov.in/PressReleasePage.aspx?PRID=2054203#:~:text=Year%2Don%2Dyear%20inflation%20rate,14%25%2C%20respectively.
  • https://www.etnownews.com/economy/cpi-data-june-inflation-jumps-to-5-08-food-prices-spike-rbis-4-target-under-pressure-article-111692372