What is Inflation?

 Inflation is measured periodically by government statistical agencies to monitor economic stability and guide policy decisions such as interest rates.

This means that if earlier the same ₹100 could buy more goods, now it can buy less goods. This indicates that our purchasing power has decreased. Government agencies usually measure inflation through the CPI (Consumer Price Index).

Calculation of Inflation

A simple way to calculate the inflation rate is shown below:

Inflation (%) = ((Current Year Price Index − Previous Year Price Index) ÷ Previous Year Price Index) × 100

Example:

Last year CPI = 150

This year CPI = 165

Inflation = ((165 − 150) ÷ 150) × 100

= (15 ÷ 150) × 100

= 10% inflation

Thus the price change can be interpreted as a percentage.

Consumer Price Index (CPI) is generally used to measure inflation. This method is used to find out the percentage increase in the price level in a particular year compared to the previous year.

That means prices have risen by an average of 10% in a year. This method of calculation makes it easier to estimate financial conditions and plan future expenses in advance.

Causes of Inflation

The main reasons for rise in inflation are:

• Demand for goods in the market is high
•  Increase in production costs (raw material, fuel, transportation).
• Government increases the money supply
• Increase in import prices

For these reasons, if demand exceeds supply, prices will rise.There are several main reasons for rising inflation. When demand for goods in the market is high and supply is low, prices rise. This is called Demand-Pull Inflation.

Also when production costs (raw material, fuel, transportation) increase manufacturers raise prices to balance their cost. This is called Cost-Push Inflation.

Inflation is also likely to increase if the government increases the money supply in the market. Besides, international factors like increase in import prices and depreciation of currency also affect the prices.

Real Life Examples of Inflation

Inflation looks like this in our daily life:

• Petrol price is higher now than a few years ago
• Rising prices of essentials like rice, vegetables and milk
• House rent in cities is increasing every year

These directly affect our family expenses.

1. These changes directly affect household expenditure and result
2. less goods being bought with the same income.

How Inflation Affects Your Monthly Budget

Inflation directly increases the cost of essential items such as food, fuel, transportation and housing. When monthly expenses rise but income remains constant, the percentage of income available for savings decreases. Over time, this reduces financial security and purchasing capacity. Therefore tracking expenses regularly and adjusting spending habits is necessary to maintain financial balance.

Advantages of Inflation

A normal level of inflation is sometimes useful for an economy:

• Increase in revenue for businesses
• The number of jobs may increase
• There is a possibility of salary increase
• A normal level of inflation is beneficial to the economy. A small increase in prices can increase revenue for businesses.
• This can increase production and create new job opportunities.
• In some cases, as the profits of the companies increase, the salaries of the employees also increase.
• Thus a controlled and low level of inflation helps to maintain momentum in the economy.

Disadvantages of Inflation

Problems due to hyperinflation:

• Declining purchasing power
• Depreciation of savings
• Greater impact on low income earners

Increase in daily expenses

• If inflation rises too much, many problems arise. Mainly due to reduced purchasing power, the same amount of money can buy fewer goods.
• The real value of money saved also decreases.
• The impact of inflation is greater on low-income families because their income increases do not keep pace with price increases.
• The increase in daily expenses is likely to reduce the standard of living.
• Hyperinflation can damage economic stability and adversely affect businesses and investments.

Practical Ways to Protect Your Money from Inflation

To reduce the effect of inflation:

• Budget planning to control expenses
• Establishment of emergency fund
• Looking into long-term investments (eg: policies like SIP).
• Learn new skills and increase income
• Cutting unnecessary costs

Although it is not possible to completely avoid the impact of inflation, its impact can be minimized with proper financial planning. First of all proper budget planning is very important to control the expenses. Unnecessary expenses can be reduced by balancing the three aspects of monthly income, expenses and savings.

It is necessary to set up an Emergency Fund for emergencies. Generally, having enough savings for at least 3 to 6 months of expenses increases financial security.

Long-term investments also help reduce the impact of inflation. For example, regular investment through SIP (Systematic Investment Plan) can increase the value of money over time. Also, financial instruments like insurance policies and pension schemes provide protection against future needs.

Additionally, learning new skills is also an important way to increase income. If income increases, the effect of price increase will be less. We can protect our money from inflation by cutting unnecessary expenses and making financial decisions in line with long-term goals.

Conclusion

Inflation is a natural process in every country’s economy. This has a direct impact on our daily life, especially as purchasing power decreases due to increase in commodity prices. Understanding the causes, calculation method and effects of inflation can help us make sound financial decisions.

The effect of inflation can be reduced by proper saving habits, long-term investments and expenditure control. Future financial stability is possible if personal financial planning is strong. So it is necessary for every individual to understand inflation and make our financial strategy accordingly.

FAQ

What is a safe inflation rate?

Generally low and stable inflation (around 2–6%) is considered healthy for the economy.

A generally low and stable level of inflation is considered favorable to the economy. Economists generally consider inflation between about 2% to 6% per year to be a healthy level. A small rise in prices that can be at this level of would sustain business activity and stabilize the economy.

But this level may vary from country to country, as each country’s economic conditions, growth rate and policies are different.

Why does inflation reduce purchasing power?

As prices rise, the same amount of money can buy fewer goods.

External Links:-

https://tradingeconomics.com/india/inflation-cpi