Inflation & CPI

Inflation is the silent thief that steals your wealth every single day. Understanding it is crucial because even if you're earning 10% on investments, inflation might be eroding 6% of it!

What is Inflation?

Inflation is the rate at which prices of goods and services rise over time. As inflation increases, each rupee buys you LESS.

Why Does Inflation Happen?

1. Demand-Pull Inflation

Too much money chasing too few goods

Example: COVID-19 semiconductor shortage

• Everyone wanted laptops for work-from-home
• Chip supply was limited
• Prices shot up 25-30%

2. Cost-Push Inflation

Production costs increase, businesses pass it to consumers

Example: Petrol price rise

• Crude oil prices increase globally
• Transportation costs rise
• EVERYTHING becomes expensive (vegetables, groceries, delivery)

3. Built-In Inflation

Workers demand higher wages → Companies increase prices → Workers demand more wages...

Example: Minimum wage increases

• Delivery boy salary ₹15K → ₹20K
• Swiggy increases delivery fee
• You pay more for same service

4. Government Money Printing

During COVID, governments printed money to support economy

• More currency in circulation
• Same amount of goods
• Currency value decreases

How is Inflation Measured? (CPI)

CPI = Consumer Price Index

It tracks prices of a "basket" of common goods and services an average person buys.

India's CPI Basket

Category	Weightage
Food & Beverages	45.9%
Housing	10.1%
Clothing & Footwear	6.5%
Fuel & Light	6.8%
Miscellaneous (health, education, transport)	28.3%

How it works:

1. Base year (2012) = 100
2. Track prices of same items every month
3. If CPI = 180 today, prices have risen 80% since 2012

Inflation Rate = ((Current CPI - Previous CPI) / Previous CPI) × 100

Real Example

• Jan 2023: CPI = 165
• Jan 2024: CPI = 171.6
• Inflation = ((171.6 - 165) / 165) × 100 = 4% annual inflation

Types of Inflation

1. Creeping Inflation (0-3% per year)

• Healthy for economy
• Encourages spending and investment
• Example: Most developed countries

2. Walking Inflation (3-10% per year)

• Moderate, manageable
• India typically in this range (5-7%)

3. Galloping Inflation (10-100% per year)

• Serious problem
• Venezuela, Zimbabwe examples
• Prices double/triple rapidly

4. Hyperinflation (>50% per month!)

• Economic disaster
• Currency becomes worthless
• Zimbabwe 2008: 79.6 billion percent monthly inflation!

Inflation in India (Recent History)

Year	Inflation Rate
2010	12% (crisis level)
2015	5.9%
2020	6.2% (COVID spike)
2022	6.7% (due to Ukraine war, oil prices)
2024	5.1% (controlled)

RBI's target: Keep inflation at 4% (±2%)

How Inflation Destroys Wealth

The FD Trap

Scenario: You put ₹10 lakhs in FD at 6.5% interest

• You earn ₹65,000 per year (taxable)
• After 30% tax: ₹45,500 actual gain
• Real return: 4.55%
• Inflation: 6%
• Net effect: -1.45% (you're LOSING money!)

Lesson: FD is NOT investment for wealth growth. It's for safety, not returns.

Real Rate of Return

Formula: Real Return = Nominal Return - Inflation

Examples:

Investment	Nominal Return	Inflation	Real Return
Savings Account	3.5%	6%	-2.5% (Loss!)
FD	6.5%	6%	+0.5% (Barely positive)
Equity Mutual Fund	12%	6%	+6% (Actual wealth growth)
Real Estate	8%	6%	+2% (Modest growth)

Key Insight: Only investments beating inflation create real wealth!

How Inflation Affects Different People

Losers from Inflation

1. Fixed Income Earners

• Pensioners getting ₹20K/month
• Amount stays same, but buys less every year

2. Savers (in cash/low-interest accounts)

• Money loses value sitting idle

3. Lenders

• You lent ₹1L, get back ₹1L after 5 years
• But that ₹1L is worth less now!

Winners from Inflation

1. Borrowers

• Home loan of ₹50L today
• Repay same ₹50L over 20 years
• Real burden decreases as currency value falls

2. Asset Owners

• Real estate, gold, stocks appreciate with inflation

3. Businesses

• Can increase product prices
• Wages increase slower than prices (profit!)

How to Beat Inflation

Strategy 1: Invest in Appreciating Assets

✅ Good Inflation Hedges:

• Stocks/Equity MF: 12-15% long-term (beats inflation)
• Real Estate: 8-10% (physical asset)
• Gold: Tracks inflation ~7-8%
• Commodities: Rise with inflation

❌ Poor Choices:

• Cash under mattress (-6% real annually!)
• Low-interest savings (-2% to -3%)
• Long-term FD in high inflation period

Strategy 2: Increase Income Faster than Inflation

• Learn high-value skills
• Switch jobs every 3-4 years (30%+ hikes)
• Side hustles
• Business/freelancing (unlimited upside)

Strategy 3: Index Your Expenses

If your salary increases 10% but inflation is 6%:

• Increase savings by that 4% gap
• Don't increase lifestyle proportionally

RBI's Role in Controlling Inflation

Tools RBI Uses:

1. Repo Rate (Currently ~6.5%)

   • Higher rate → Expensive loans → Less spending → Prices cool down
   • Lower rate → Cheap loans → More spending → Inflation rises

2. Cash Reserve Ratio (CRR)

   • Force banks to keep money with RBI
   • Less money for banks to lend → Controls inflation

3. Open Market Operations

   • Buying/selling government bonds
   • Controls money supply

Why 4% target?

• Too low (Less than 2%) = Economic stagnation
• Too high (>6%) = Erodes savings
• 4% sweet spot = Growth + Stability

7-Day Action Plan

Day 1: Calculate your real returns (investment returns - inflation)
Day 2: Identify investments earning below inflation (savings account?)
Day 3: Research inflation-beating options (equity MF, index funds)
Day 4: Move idle cash to liquid funds (earns 5-6%)
Day 5: Ensure salary hikes beat inflation (negotiate better!)
Day 6: Track one expense that's inflating fast (education, healthcare)
Day 7: Budget for inflation (add 7% buffer to future expenses)

Quiz

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💡 Final Thought: Inflation is inevitable. The question isn't whether prices will rise—it's whether YOUR income and investments will rise faster. Invest wisely, inflation becomes your ally instead of your enemy!