Inflation, is an economic concept. The effect of inflation is the rise in prices of commodities and the consequent devaluation of money . Take this example : A movie ticket was for a few paise in my Dad’s time. Now it is worth Rs.50. My Dad’s first salary for the month was Rs.400 and over the years it has now become Rs.75,000. This is what inflation is, the price of everything goes up. Because the price goes up, the salaries go up .
If you really think about it, inflation makes the worth of money reduce. What you could buy in my Dad’s time for Rs.10, nowadays you will not be able to buy for even Rs.400. The worth of money has reduced !
If this is still not clear,consider this : When my father was a kid, he used to get 50 paise as pocket money. He used to use this money to go and watch a movie (At that time you could watch a movie for 50paise!).
Now, just for the sake of understanding let us assume that my Dad decided in his childhood to save 50 paise, thinking that one day when he becomes big, he will go for a movie. Many years pass. The year now is 2014. My Dad goes to the theater and asks for a ticket. He offers the ticket-booth-guy at the theater 50 paise and asks for a ticket. The ticket booth guy says, “I am sorry sir, the ticket is worth Rs. 150. You will not be able to even buy a “paan” with the 50 paise!”
The moral of the story is that the worth of the 50 paise has reduced dramatically. 50 paise could have bought a whole lot when my Dad was a kid. Now, 50 paise can buy nothing. This is inflation. This tells us two important things :
Firstly: Do not keep your money stagnant. If you just save money by putting it in your safe it will lose value over time. If you have Rs.1000 in your safe today and you keep it there for 10 years or so, it will be worth a lot less after 10 years. If you can buy something for Rs.1000 today, you will probably require Rs.1500 to buy it 10 years from now. So do not keep money locked up in your safe.
Always invest money !
If you can’t think where to invest your money, then put it in a bank. Let it grow by gaining interest. But whatever you do, do not just lock your money up in your safe and keep it stagnant. If you do this, you will be losing money without even knowing it. The more money you keep stagnant, the more money you will be losing.
Secondly: When investing, you have to make sure that the rate of return on your investment is higher than the rate of inflation !
What is the rate of inflation?
As said earlier, the prices of everything goes up over time and this phenomenon is called inflation. The question is: By how much do the prices go up? At what rate do the prices do up?
The rate at which the prices of everything go up is called the “rate of inflation”. For example, if the price of something is Rs.100 this year and next year the price becomes approximately Rs.104 then the rate of inflation is 4%. If the price of something is Rs.80 then after a year with a rate of inflation of 4% the price will go up to (80 x 1.04) = 83.2
So, when you make an investment, make sure that your rate of return on the investment is higher than the rate of inflation in your country .
What is the rate of return?
The rate of return is how much you make on an investment. Suppose you invest Rs.100 in the market and over a year, you make Rs.120, then you rate of return is 20%.
Reasons for inflation.
It happens because of many reasons like if rate of interest for loans is decreased, more number of people will be availing loans and thus more amount of money will be out in the public.
And more is the money, lesser is the value of that. Then inflation happens i.e. purchasing power of money decreases and thus the prices goes up.
So to control the inflation, government has to to control the amount of money in the hands of public. So, the rates for loans are increased or decreased once every two months to control inflation.
Causes of Inflation
- The Money Supply. Inflation is primarily caused by an increase in the money supply that outpaces economic growth. …
- The National Debt. …
- Demand-Pull Effect. …
- Cost-Push Effect. …
- Exchange Rates.
Now consider this :
The annualized inflation rate in India is 8.9% as of June 2012, as per the Indian Ministry of Statistics and Programmer Implementation.
Also , the Provisional annual inflation rate based on all India general CPI (Combined) for November 2013 on point to point basis (November 2013 over November 2012) is 11.24% .
And, if you consider the current rate of return being provided by the central and state banks in India it comes out to be 4%-6% for a Savings bank account , depending on the bank .
So , it is pretty obvious that even if we are putting our money in savings accounts , its value is decreasing every day .
Let us come to deposit accounts . The annual rate of return for deposit accounts vary between 9%-11% depending on the bank .
So , even if we are putting our money in deposit accounts , we are losing money marginally !
In 2006 , the inflation rate was around 4% which was quite good considering the then offered rate of returns of banks in India .
But after 2006 , the inflation rate has gone up drastically so much so that we are losing money everyday even if we are depositing our money in banks . We necessarily have to venture in investments which give us return more than the current inflation rate so as to avoid losing our money . In this case scenario , the only people who could put to use their money to get commendable returns are the ones who would invest a wholesome amount in equities , funds or companies which can provide them with the necessary rate of return .
So , the people belonging to the lower class and the middle class who are unable to put large amounts of money, or are unwilling to put their money in investments and are comfortable depositing them in banks , are just losing their hard earned money without even knowing !
The current government has been a huge failure in this issue of controlling the inflation rate . And the sad part is that it has never been a major governance factor for them for a whole decade . We , the working class Indians , hope that the next government which is going to be made in some days’ time , considers this factor one of the primary issues to be curbed for the development of the nation .