Inflation and Its Impact

Inflation is a very important aspect that needs to be considered since it impacts ones earnings, investments, purchasing power & lifestyle.

In March 2010 a number of agencies are expected to assess inflation for the fiscal year of 2009-2010 at anywhere between 6.5% (RBI estimate as of October ‘09 policy review) to 8% [Economic Times]

This means that on average goods and services in India will cost from 6.5% to 8% more as compared to the previous year.

Consider your investments. If you have been holding a diversified portfolio with debt and equity and earned around 15%, then you are doing well because you earned money in real terms. Anything more than 15% is icing on the cake. If you have been holding all your money in FDs yielding around 6% to 7% or in a cash account at bank earning about 3% to 4%, then you have actually lost money this year. You will purchase less for the same price than you could in the previous year.

Inflation is more important in emerging markets like India than developed markets. The currency, prices, economy, and the general economic system are more volatile and they are growing faster and will generally produce sharp swings in inflation which need to be closely monitored. If you watch carefully, invest well and are well advised, you can do well. In a highly inflationary environment, investments also tend to earn higher returns to reward investors.

Inflation is not static. Inflation for the assessment year 2007-2008 was 4.5%. It changes all the time and it is difficult to predict it with great accuracy.

Another factor to be aware of is how uneven inflation can be. Education costs in both the USA and in India have far outpaced average inflation for many years. This is very important while planning your child’s higher education, whether in India or abroad. Food prices worldwide also come under the higher inflation rates (for November increase was 19% as per the Economic Times of Dec 14)

Retirement is a key area to watch out for. One needs to save large amounts & save early to get the retirement benefits to support in old age. The era of company-offered pensions is declining and one needs to take care of himself/herself. Even those persons with a pension will soon find its value eroding if the pension amount is fixed but the economy is not.

Whatever is the strategy used, one needs to be aware of the inflation rate and make sure he/she is keeping up with it, if not surpassing it, in their investments and other earnings.