Inflation is the upward movement in the average prices of general goods and commodities. A rise in inflation means an increase in the overall cost of living.
Inflation affects your ability to purchase goods and services, making them costlier over time. For example, 10 years back, a litre of milk would cost
15. The same milk today costs
35. Similar price rises across various essential commodities such as cereals, pulses, oil and petrol have a big impact on your monthly budget. This means that people have to spend more money to buy the same things that they used to buy for less.
Inflation is often measured with reference to the Consumer Price Index or CPI and Wholesale Price Index or WPI. While CPI tracks weighted averages of 200 essential goods and commodities, WPI tracks average prices of commodities traded in bulk. Inflation is expressed as a percentage.
For example, if WPI is 4%, it means that the price of a basket of essential commodities like primary food products, fuel and key manufacturing products have risen by 4% on an average as compared to the previous year. It would mean that we need to pay 4% more for the same amount of things we bought 12 months back.
How does inflation affect us?
Inflation is directly linked to purchasing power. CPI and WPI greatly affect the monetary policy, which in turns affects the interest rates on your savings and the loan that you may have, making the EMI costlier in case of inflation. It also directly affects your saving capacity and plays a key role in planning your investments.
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For instance, ₹100 earned will be worth just ₹93 if the inflation rate is 7%. Therefore, when you invest, one of the key objectives should be to keep pace with inflation or beat inflation. In order to beat inflation, your investments should generate returns that are higher than the inflation rate.