Simply put, inflation is the increasing cost of everything around you with the gradual decline in the value of your money. To understand this further, consider the cost of any staple in your home that you have been buying over the past few years and think about how that cost has increased over the years.
The cost of milk increased from INR 15 per liter in the year 2002 to INR 48 per liter – the price of milk today. Here’s why it’s vital to consider staples like these as examples. Inflation is calculated by considering the cost increase of such staples that can be counted as common purchases for larger masses. This means – inflation rates can vary for your household.
It is important to note that your household expenses may also exceed that of the average taken into consideration while calculating the rate of inflation.
How is Inflation Calculated?
The two kinds of indices used to measure inflation are the consumer price index (CPI) and the wholesale price index (WPI). These two measures are used to analyze the inflation rate on a regular consumer (or retail level) by considering expenses like food, education, healthcare, electronics and other regular expenses that a regular consumer would need to pay for, and the cost of goods that are sold in bulk, or wholesale, to merchants and vendors.
CPI takes into consideration 260 commodities. In order to do this, it takes into account the prices of sample goods on a monthly basis in order to map the change in price. The CPI for the month of February was calculated to be 6.07%. The base year for CPI, or the first year in the considered time period, was changed to 2010 from 2012. It may help to note that 100 is often taken as the base price for easier calculations.
WPI takes into consideration 697 commodities. These commodities are made up of primary articles, manufactured products, and fuel and power. The ministry of Commerce and Industry calculates a collective price on a monthly basis to determine the WPI. For instance, the WPI for the month of February is 13.11%, a rise from the previous month’s 12.96%.
While inflation is calculated while considering common necessities or staples, and the government takes measures to keep it under control, it is important to ensure that you’re financially disciplined, not just about your expenses but about your savings and investments too. Remember, even if your salary rises with inflation, the latter is rising at a much faster pace. Additionally, not all salaries increase along with inflation.
In 2010, INR 43.71 was worth $1. In 2022, approximately INR 76.21 is worth $1. As we look at how the Indian rupee fell about INR 32.5 in value, it is important to realize that even if you put money away for your future, your pile of savings is subject to inflation risks and the falling rupee value.
This means that if you are building up a savings reserve, you should consider the current inflation rate as a deduction to your savings for the year.
How To Beat Inflation?
With a currency tied to a falling value and the increasing costs of living, the only way to ensure that you’re not just paying bills but are also building your wealth. You can do this by putting your money to work via investing.
While this may seem obvious and the path may seem simple with a plethora of investment options at each person’s disposal, it is common to falter in choosing the right investments to beat inflation.
Choosing the right investments can help you better your chances of securing the value of your savings by helping them grow at the right pace to overtake inflation.
The ideal tools to beating inflation
Very often, saving is considered enough when it can barely get you by. Investing helps you take your savings a bit further and make them an asset to you that grows in value over time. This, however, happens only when investing is done right.
If you’re investing in tools that offer you a rate of interest that is lower than the inflation rate, your investment will still fail in a race against inflation. Alternatively, if you make more returns on your savings via the right investment tools, you’re able to keep up with the inflation rate and have extra money post paying your bills.
Growing your wealth is a result of investing right
Investing in stocks can be a good way to go about it. With India’s equity participation at 5-6%, the stock market holds a lot of potential that has not been tapped into. Real estate and real estate investment trusts can help you diversify your investment portfolio and provide long-term holdings if you’re not looking for short-term liquidity.
Gold, an investment that’s considered to be the best in India, can also be a good investment option. ETFs can also add great value and diversification to your investment portfolio. A diversified portfolio has risks balanced out across different investment options, so if one goes bad, you’ve got different types of backup plans.
Debt investments have been known to be the alternative to fixed deposits and offer stable returns that act in a protective manner against market volatility. So, these add value to your investment portfolio too.
Not risking it can be risking it
If you’re considering sticking to fixed-return investment options, it is important to note that by not giving your savings the opportunity to grow, you are risking their value – as they are not provided with the opportunity to grow enough to beat inflation.
It is important to ensure that myths and baseless fears do not control your investing choices. Additionally, it is also essential that you logically analyze your financial requirements as per your needs and income and then choose your investment route as per those measurements.
Get more help if you need it
While we all start somewhere, it is only human to need a helping hand sometimes. So, if you’re unsure how to go about planning your investments to beat inflation, it would be advisable that you call in a professional to help you. A certified investment advisor can help you put your savings to the best use and ensure that you’re able to do more than keep abreast of the rising costs of your lifestyle and create wealth.
Bottom Line
Beating inflation starts with understanding it, so you know how it poses a threat to your savings. Remember, regular financial checks of expenses, savings and investments can help you maintain financial discipline. Finally, be consistent in planning your finances, preparing yourself financially for the future and working on securing your savings against inflation.
