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WHAT IS INFLATION & How to Stay Ahead of It?

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Inflation has the potential to affect all aspects of the economy, from business investment, employment rates, and consumer spending, to tax policies, government programs, and interest rates. Understanding inflation is fundamental to investing as inflation can reduce the value of your returns on investments.

What is inflation?

Inflation refers to the general rise in the price of good and services such as housing, clothing, food, recreation, transport, etc. It measures the average price change in the basket of services and commodities over time. It is measured in percentage terms.

Understanding Inflation in Detail

Inflation indicates a fall in purchasing power. As prices rise over time, a single unit of currency loses its value and buys comparatively lesser goods and services. This loss of purchasing power greatly impacts the cost of living for the general public that ultimately leads to a deceleration in economic growth.

When you hear your grandparents recall the amount of goods and services they could have bought with Re. 1, they are observing inflation – the rising cost of goods and services over a period of time along with the decrease in the purchasing power of the rupee.

Types of inflation

Following are the four main types of inflation:

  1. Creeping inflation
    It is a situation where inflation in an economy increases gradually. It is one of the mildest types of inflation and is required to maintain a stable economy.
  2. Walking inflation
    Also known as trotting inflation, it is a situation when the prices rise up to 10%. Walking inflation gives a cautionary signal for the occurrence of galloping inflation.
  3. Galloping inflation
    It refers to the state of the economy when the prices of the goods and services increase at a rapid rate of 10% and more. In this state, the currency loses its value and citizens are unable to keep up with the rise in the prices of goods and services. It causes a serious economic imbalance in the country and calls for strict control measures.
  4. Hyperinflation
    Hyperinflation is experienced by an economy when the prices skyrocket more than 50% in a month. The primary cause for such situations is the rise of money supply in an economy which is not supported by GDP growth. Hyperinflation is a rare phenomenon.

Causes of inflation

There are various factors that can drive inflation in an economy. Following are some of the primary causes of inflation:

  1. Demand-pull inflationDemand pull effect inflation occurs when the overall demand for services and goods in an economy increases swiftly than the economy’s production capacity. This creates a demand-supply gap, with higher demand and lower supply, resulting in heightened prices. For instance, if the oil-producing countries decide to cut down the production of petroleum and other hydrocarbons, the supply decreases. This lower supply for existing demands results in a rise in the price and contributes to inflation.
  2. Cost-push inflation
    This theory states that when industries face increased input costs such as wages and raw materials or goods, they serve their profitability by passing this increased cost of production to the consumer in the form of higher prices, which further contributes to inflation. For instance, if the cost of milk increases, the cost of each cup of coffee at your local coffeehouse will also increase.
  3. Built-in inflationAs the price of goods and services increase over time, labourers/employees expect more wages/salary to maintain their cost of living. Their increased wages/salary results in higher cost of goods and services, and this wage-price spiral tends to continue, as one factor induces the other and vice-versa.
  4. Exchange rates
    Exchange rates are one of the most essential factors in determining the rate of inflation. When the exchange rate suffers such that the rupee becomes less valuable relative to foreign currency, this makes foreign goods and consumers more expensive to Indian consumers while simultaneously making Indian goods, commodities, services, and export cheaper to consumers overseas.
  5. Money supply
    The value of money is determined by the amount of currency in circulation. When money supply outpaces the growth in economic output, i.e. when more money is chasing the same amount of goods, the increased demand provides firms with the opportunity to raise prices, consequently resulting in inflation.  
  6. National debt
    National debt can drive inflation to higher levels over time. A country in national debt has two options – either raise taxes or print more money to pay off the debt. If the government increases taxes, businesses will react by increasing their prices to offset the increased corporate tax rate. If the government chooses the latter option, it will directly lead to an increase in money supply, leading to a devaluation of the currency and contributing to inflation.

How is the inflation rate measured in India?

In India, usually, two kinds of indices are used to measure the inflation rate –consumer price index (CPI) and wholesale price index (WPI), which measure retail and wholesale-level price changes, respectively.

The WPI captures the goods and services sold by businesses to smaller businesses for further selling. On the other hand, CPI calculates the difference in the price of commodities and services such as medical care, food, electronics, education, etc, that Indian consumers buy for personal use.

Who controls and measures inflation in India?

The Central government is in charge of adopting measures to ensure the smooth running of the economy while the Ministry of Statistics and Programme Implementation measures inflation in India.

How to combat inflation?

Here are some ideas to hedge your investment portfolio from inflation:

  1. Spend money on long-term investments
    Investing in long-term investment avenues can help you to benefit from inflation over a period. Long-term investments have the potential to fetch inflation-beating returns. Some long-term investment options are real estate, mutual funds, gold investments, stocks, etc.
  2. Invest in commodities
    Commodities such as oil, gold, and other precious metals have an inherent worth that is often resilient to the effects of inflation. Unlike money, commodities are almost always in demand and, thus, can act as an excellent hedge against inflation.
  3. Invest in real estate
    Real estate is a popular choice among investors as it has offered an inflationary hedge time and again. Investments in real estate offer returns in two ways – rentals and capital appreciation.
  4. Invest in inflation-indexed bonds (IIB)
    Investing in bonds might seem counterintuitive as inflation could be destructive to fixed-income securities. However, to overcome this obstacle, you can invest in inflation-indexed bonds that provide constant returns irrespective of the level of inflation in the economy.
  5. Do not shy away from equities
    Equities have a higher chance of keeping pace with inflation. Investors should focus on corporations that can pass their rising product costs to customers, such as those in growth stocks as well as the consumer staples sector.

Inflation is quite real and ignoring its effects can have a drastic impact on your investment returns. To increase your investments’ worth over time, you need to direct it into investments that have the potential to yield inflation-beating returns. Your investment strategy should, therefore, calculate the inflation rate and invest in securities that can hedge it. Happy Investing!

महंगाई का सीधा-सीधा अर्थ है कीमतों में वृद्धि और पैसे की खरीद शक्ति का घटना. यानी महंगाई आपके पैसे के भविष्य में खरीदारी करने के मूल्य को घटा देती है. लंबी अवधि में अपने पैसों का मूल्य बढ़ाने के लिए, आपको ऐसी जगह निवेश करना चाहिए जिससे वह महंगाई को पीछे छोड़ सके. इसलिए आपकी निवेश रणनीति ऐसी होनी चाहिए कि आमदनी की वास्तविक दर या आमदनी महंगाई की दर से अधिक हो. अपने निवेश लक्ष्यों को पूरा करने के लिए आपको सोच विचारकर ऐसी निवेश रणनीति बनानी चाहिए जो महंगाई को पीछे छोड़ सके. इस वीडियो में आपको महंगाई और उससे एक कदम आगे रहने के बारे में समझाया गया है.

ફુગાવો એટલે કિંમતોમાં થતો સામાન્ય વધારો અને પૈસાની ખરીદ ક્ષમતામાં થતો ઘટાડો. સરળ શબ્દોમાં કહીએ તો ફુગાવો ભવિષ્યમાં તમારા નાણાનું મૂલ્ય ઓછું કરે છે. લાંબા ગાળે તમારા નાણાના મૂલ્યમાંવધારો કરવા તમારે તેને એવાં રોકાણોમાં લઈ જવાની જરૂર છે જે ફુગાવાને નાથી શકે છે. તમારી રોકાણ નીતિમાં એટલે જ વળતરનો વાસ્તવિક દર અથવા ફુગાવાના દર ઉપરાંત મળતા વળતરની ગણતરી કરવી જોઈએ. તમારા રોકાણ હેતુને સાકાર કરવા સૌ પ્રથમ ફુગાવાની અસરથી બચવા તમારે વિચારપૂર્વકની રોકાણ નીતિ અપનાવવી જરૂરી બને છે. ફુગાવો અને તેનાથી કઈ રીતે આગળ રહેવું એ સમજવા આ ટૂંકો વીડિયો જુઓ.

স্বাভাবিক মূল্যবৃদ্ধি এবং অর্থের ক্রয়ক্ষমতা হ্রাসের মানেই হল মুদ্রাস্ফীতি| সহজভাবে বলতে গেলে, ভবিষ্যতে আপনার অর্থমূল্য হ্রাস করবে মুদ্রাস্ফীতি| দীর্ঘ সময় ধরে আপনার অর্থের মূল্য বৃদ্ধি করতে, আপনাকে সেটিকে চালিত করতে হবে বিনিয়োগের দিকে যা মুদ্রাস্ফীতিকে হার মানাতে পারবে| আপনার বিনিয়োগের কৌশলকে অতএব ফেরতের বাস্তব হারের গণনা করতে হবে অথবা মুদ্রাস্ফীতির হারের থেকে বেশি ফেরত দিতে হবে| আপনার আর্থিক লক্ষ্যপূরণের জন্য আপনাকে ভালোভাবে চিন্তাভাবনা করে একটি বিনিয়োগ কৌশল গ্রহণ করতে হবে, মুদ্রাস্ফীতিকে প্রথমেই হার মানানোর জন্য| মুদ্রাস্ফীতির সমন্ধে আরও বিশদে জানতে এবং কী করে তাকে হার মানাবেন তা জানতে এই ছোট ভিডিওটি দেখুন|

பண வீக்கம் என்பது பொதுவாக விலைவாசி உயர்வு மற்றும் பணம் மூலம் வாங்கும் திறனில் குறைவு என்பதாகும். சுருக்கமாக சொல்வதானால், பண வீக்கம் வருங்காலத்தில் உங்கள் பணத்தின் மதிப்பை குறைத்து விடும். நீண்டகால அளவில் உங்கள் பணத்தின் மதிப்பை அதிகரிக்க, நீங்கள் உங்களிடமிருக்கும் பணத்தை சரியான விதத்தில் முதலீடு செய்தால் பணவீக்கத்தை வெல்ல முடியும். உங்களின் முதலீட்டு திட்ட முறை, பணவீக்க விகிதத்துக்கும் அதிகமாக வருமானம் அல்லது வருமானங்கள் பெறும் விதத்தில் கணக்கிடப்பட வேண்டும். உங்களின் முதலீட்டு இலக்குகளை அடைய, முதலில் பணவீக்கத்தை வெல்லும் விதத்தில் தக்க முதலீட்டு திட்ட முறையை நீங்கள் உருவாக்கிக் கொள்தல் அவசியம். பண வீக்கத்தைப் பற்றி அதிகம் அறியவும் மற்றும் எவ்வாறு அதை வெல்வது என்பது பற்றி அறியவும் இந்த சிறு வீடியோவைப் பாருங்கள்.