Inflation: Is it as dangerous as it seems?

by April 20, 2017
Inflation Is it as dangerous as it seems

The term “Inflation” is something most people are used to hearing. It’s a common financial jargon. However, many are not aware of what it exactly means and how it impacts their lives.

What is Inflation?

Inflation is the sustained increase in price of essential products, services, and utilities over time. With increase in inflation, the value of your savings decreases and so does the purchasing power of the money you have in hand.

It is easy for you to understand “inflation” if you keep a tab on your purchases. The impact can be felt over a year for a product or service that you buy consistently. Did your grocery bill go up as compared to the same month last year? Did the same shirt from the same brand cost you 10% more this year as compared to last? Are you paying more than last year for the monthly pass taken by you when you avail public transport? All these are a direct result of inflation.

What causes inflation?

I do not want to venture into an “Economics” lesson here. My intention is to explain, in very layman terms, the causes of inflation.

One of the causes could be macro-economic changes leading to increase in prices. For example: If the import duty for a commodity (say gold) goes up, the trickle effect is felt through the supply chain and ultimately, the end customer must bear a certain increase in price.

Inflation could also be caused due to a demand-supply mismatch. We have seen the rise in prices of onion in India, at least once in the last decade. The supply of onion went down so badly that its prices were beyond the reach of the common man.

The other causes of Inflation could be unemployment that leads to more dependants in the country and hence productivity is not at its full potential. India has a lot of job opportunities and with govt. schemes like NREGA, it is not too much of a threat for us. However, the Indian equity markets still doesn’t see more than 3% participation from the population. Avenues for raising capital at reasonable interest is also not very common. Hence, the high cost of capital hinders creation of small enterprises and jobs, thus, contributing to inflation.

How does Inflation impact the common man?

The common man (in India or most other countries) tends to be risk averse. He parks his savings into fixed deposits thinking that his money is safe and he can get a return of around 8% to 10%. However, he does not factor inflation which hovers around the 7%-8% mark. This means that after a year, he effectively earns only 1% -2% on his money. Such meagre returns on investment doesn’t augur well for him in the long run.

Inflation is a double-edged sword. While his savings do not give him great returns if he parks it in fixed deposits, his purchasing power also decreases because the cost of goods, services and products (including essential commodities) that he needs for daily use are all costlier than the year before.

Can Inflation be tackled?

The good news is – Yes. While you cannot do too much about macro-economic policy or the interest rates in the country, you could wisely invest your savings to counter inflation. An SIP investment in a good fund usually yields more than 20% returns per annum over time. A good financial advisor can help you to maximize return on your investment by recommending investments in equity, MFs and other high return yielding asset classes. Some of these investments such as an SIP in equity linked saving schemes (ELSS) also enables you to claim a deduction to the extent of your investment on your total taxable income.

By taking some of these easy steps today, you can start the journey of softening the blow of inflation. Your prudent investments will prove to be a comfortable armour in your fight against inflation over time.

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