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How does Inflation Affect Us?

A happy 2021 to all, may this year bring more success and money to all of us. 2020 is gone and with this a lot of poor memories too, many bad things happened, but we are still fighting like warriors and surviving this unprecedented time. Of so many terrible events, one thing that grabbed my attention was inflation. Thanks to my Bhakt friend for this. We had a discussion, which always feel like squabble with a Bhakt, on government’s stance on economy and steps taken by it. In that discussion, the point of inflation came, and he said that I cannot feel or see the effect of inflation. Apart from saying that it is reducing your savings value, I had nothing substantial to say. And this thing intrigued me. How we can see inflation in our day-to-day life? Does it really affect us? Or it is just a hoax created by economists to make finance more complicated? Let’s dig out.


Inflation

As per Investopedia, Inflation is the rate at which the value of a currency is falling and consequently the general level of prices for goods and services is rising. In simple terms, over time you will have to pay more to get a particular product or service. Say you are buying a cup of coffee for Rs. 100 today, with 4% inflation per year, the price of the same cup of coffee will be Rs. 104 next year. Inflation reduced the purchasing power of your money. 4 rupees will not bother you in the short period, but in the long run inflation will keep adding up and it will affect you if your income does not increase with the inflation. You might have heard from parents or grandparents that they used to buy ration for entire month with mere Rs. 10. Nowadays you get nothing for Rs. 10. Here inflation is playing the role and reducing the worth of Rs. 10 over ages. Inflation is a tax that affects the poor the worst and the rich the least. Rs. 5 or 6 increase will not affect Ambani and his family, but it will surely affect a daily wage earner. From all this inflation seems an evil of the economy. Hurting the poor, making things expensive and reducing the value of money. Why it is there in the first place and why government is doing nothing about it? Inflation is not that bad and By the end of this article, you will know how to tackle inflation and how it is helping you? For this, we need to know how inflation is calculated.


Inflation Rate Calculation

In India, Ministry of Statistics and Programme Implementation (MoSPI) has the responsibility to release the inflation data of every month. Our ministry uses Consumer Price Index (CPI) to measure inflation. Consumer price index is calculated by adding the price of products and services an average citizen uses and comparing it with a base year. India uses 2012 prices as a base to calculate the CPI. CPI value will be in hundreds as we considered base year prices as 100. So, if in 2020 CPI is at 165, this means that prices have risen 65% from the year 2012, as we have taken 2012 prices as 100. And suppose in 2021, CPI is 171, this means prices have risen 71% compared to 2012 and 4% compared to 2020. This 4% is inflation. CPI is a good measure for the country, but it has flaws.



It is good for analyzing the inflation for entire nation but for individual it’s a no. Why? Look at the composition of CPI calculated by MoSPI. Snapshot below is of provisional data released by MoSPI for November month of 2020.


Move your focus to column 10 to weight of the food and beverages, 45.86%. I am fond of food, but I do not spend that much of my total expense on food per month rather I am a tech savvy and spend a lot on new machines and devices. Some of you might have inclination for clothing and footwear or recreation and amusement, such that your major expense are those. Increase in prices of onion may not affect you that much, but an increase in Netflix subscription or iPhone price can. So, if you make your own price index, you realize that government reported inflation is far subdued than yours. Yours can touch 10%-12% year on year basis while governments will report 5% inflation. Here we cannot say government is wrong, it has the responsibility of 1.35 crore citizens, and it must keep things in balanced. But in the hindsight, we are losing our standard of living faster that what government is telling us. To cope up with this, you must work harder and innovate yourself. And this is the benefit of inflation. Inflation drives growth. The expectation of price hike and future inflation compels us to be more productive. That is why economists do nothing to end inflation but insist that moderate inflation is good for economies.


Governments employ a lot of resources to keep inflation in check. In India, the government tries to maintain an inflation rate around 4% with plus/minus 2% as tolerance. RBI has this responsibility, but for the past few months India is clocking inflation rate of 7 to 10% which can be worrisome. With FDs rate at 6%, many are getting negative real return. And this inflation rate is average and we might we be experiencing more than this at an individual level. I suggest that you maintain a monthly log for prices of the items you buy. By this you can keep track of the inflation that is really affecting you. Inflation is reducing your purchasing power so you require a growth rate of atleast the inflation rate you are facing to maintain the worth of money you hold either by investing or by increasing your income.

Fin.

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