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.