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Understanding Inflation

23 January 2023

10 mins

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Table of Contents

Inflation, in the simplest terms, is the rising costs of commodities and services in the country, whether it’s food, housing, fuel, light, transportation and communication.

You must have heard your parents talk about how prices have risen over the years. Did you know that a tola (10 grams) of gold was priced at ₹3,200² in 1990? It now costs almost Rs 53,000!

According to this report ³, the price of cooking oils rose from 50-100% in the last year, mainly because of the Russia-Ukraine conflict. Sunflower oil used to cost Rs 98/litre in 2019 and now costs between Rs 180-250.

The rate of inflation can vary across years and it becomes an important facet of financial planning. For instance, this report⁴ shows an upward trend in costs from July 2022 to August 2022. The inflation rate of food rose from 6.75% to 7.62%.

Inflation is caused by a blend of many factors and has become even more complex with the coronavirus pandemic and consequent lockdowns and labour shortages. Reasons like increasing demand for goods and services, rising costs of raw materials and wages, devaluation of the currency, and increasing taxes and subsidies - can all contribute to rising inflation.

So, How Does Inflation Affect You?

As we can see, inflation has a direct impact on our everyday expenses (grocery bills, utilities, fuel, etc.) as well as long-term investments (buying a house, children’s education, etc.). You will have to pay more for every product and so, the higher the inflation, the lower your purchasing power. You cannot use the same amount of money to buy the same things in the future.

It is, therefore, important to save and make worthwhile investments to secure your and your family’s financial futures, especially if you are the sole earning member. Your investments should accommodate inflation to ensure that the money you accumulate doesn’t fall short in the future.

How Does Inflation Affect Your Savings?

👉First, let’s assume that a product costs Rs 10,000 today and that the inflation rate is 6% per year. This table shows you how the product price will vary over the years:

2022	Rs 10,000
2023	Rs 10,600
2024	Rs 11,236

And so on.

👉Now, let’s see how a savings amount of Rs 10,000 will change over the years.

2022	Rs 10,000
2023	Rs 9,400
2024	Rs 8,836

And so on.

What can you observe from both these tables? It is evident that as inflation continues to grow, the price of goods/services will rise and the value of your savings will dwindle - and you may not be able to live the same lifestyle and buy the same products for the same amount of money.

So, make sure you factor in inflation whenever you make an investment whether it’s a fixed deposit, mutual fund, retirement savings scheme, life insurance, etc. What seems a comfortable amount today may not be sufficient a few years later - when you actually need the money.

Why You Must Consider Inflation When Buying Life Insurance

A life insurance plan spans decades. You buy it to secure the financial future of your family when you aren’t around - and to fulfil your long-term objectives like buying a house, paying for your child’s marriage, etc. You must factor in inflation so that the cover amount you choose is sufficient enough to meet the goals you have in mind as well as support your family’s financial future.

Here Are A Few Reasons Why You Should Factor In Inflation While Deciding The Cover Amount -

Inflation reduces your purchasing power

As discussed before, as prices rise, your purchasing power decreases. For example, movie tickets cost around Rs 130 a few years ago and now they cost above Rs 200. The same thing happens with your insurance plan. What seems adequate right now might not be enough in the future. As the purchasing power of the rupee decreases, the same amount of money will not prove to be sufficient to cover increasing costs.

Your expenses increase with age

You take on more financial responsibilities as you grow older - taking care of your parents, getting married, having children, retirement. This comes with attached expenses like buying a vehicle, investing in a house, healthcare, education, retirement savings, etc. The returns of your life insurance should accommodate all these expenses. This becomes even more crucial if you are the primary breadwinner and want your family to live a comfortable life even in your absence.

For instance, if you have taken a loan to buy a house and unfortunately pass away before it is repaid, the entire responsibility will fall on your family’s shoulders. Your cover amount should be sufficient to repay the loan.

Inflation rates vary according to your goals

Every person has different financial goals. For instance, if you have children, you need to fund their education. If you have dependent parents and a spouse, you need to take care of their daily expenses, medical costs, etc.

While calculating the amount you will need to achieve these goals, you need to factor in inflation. Your cover amount should conform with your financial goals and the expected rise in costs.

This brings us to the end of this article. We hope it helped you understand how inflation works and how it affects your financial investments. So, ensure you take inflation into account while calculating the cover amount of your life insurance policy. By doing so, you can be sure that the amount you choose today will be enough to cover your future goals and support your family in your absence.

https://www.bankbazaar.com/gold-rate/gold-rate-trend-in-india.html³
https://theprint.in/india/as-cooking-oil-prices-rise-indian-households-spend-more-look-for-cheaper-alternatives-survey-shows/912563/⁴
https://tradingeconomics.com/india/inflation-cpi⁵