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What is Inflation?
Inflation erodes your purchasing power within an economy. It is driven by a broad rise in the prices of goods and services. Simply put, your rupee will not fetch you as much as it did yesterday. Let us take you through an example to understand the true implication of inflation. How many cups of tea could you purchase at a roadside vendor’s stall with a 10 INR note back in 2002? At least 4 cups if not more. Cut to 2022, you can merely buy 1 cup of tea for that given price. That is inflation. It does not only affect the food you eat; it affects every sphere of your purchasing journey.
Without further ado, let us understand the other aspects of inflation.
Key Indicators of Inflation
India has unfortunately continued to experience high inflation over the years. Economic policymakers continue to employ two important key indicators of inflation in India.
- Consumer Price Index (CPI) – Consumer Price Index or CPI is a metric that considers the change in prices of goods and services across different commodities. The numbers are gathered by the two institutions, namely the Ministry of Labour and the Ministry of Statistics and Program Implementation. It takes into consideration the change in prices of 260 commodities purchased by consumers.
- Wholesale Price Index (WPI) – Wholesale Price Index or WPI takes into consideration the change in the price of goods across 697 commodities. As the name suggests, it seeks data from purchases that are made by consumers in a wholesale setting. For instance, purchases that are made through factories, wholesale grocery markets and more.
What causes Inflation?
Annual inflation is a normal part of a healthy and thriving economy. It promotes pricing stability and stimulates spending when the economy needs an economic boost. However, a higher year-on-year increased percentage is a reason for concern. Here are some causes of inflation in India.
Demand-Pull Inflation – As the name suggests, this happens when the demand for certain commodities is higher than the economy’s ability to meet the same. Inflation is caused when the demand surpasses the supply.
Increased Money Supply – When the supply of money circulation increases on the market, it may surpass the rate of production. There could be too many rupees chasing fewer products and this triggers inflation.
Cost-Push Inflation – The increased cost of wages and production has a direct effect on the price of the final good. Increased prices are pushed onto the consumer and this situation is termed cost-push inflation.
Currency Devaluation – The devaluation of the country’s currency leads to exports becoming cheaper. The correction in the country’s exchange rate in turn causes the currency to hold a lower value and drive inflation.
Read more: How to start investing in Crypto Assets?
How to beat inflation in India?
Over the years, the rising cost of living has led to anxiety and fear. From the grocery store to your wealth portfolio, the effect of inflation can be felt all around us.
With prices becoming steep, here are some of the ways to beat inflation in India.
Make Tax-Efficient Decisions
The savings made through tax can seem minuscule but do have a major impact on your wallet over the long term. Adopt smart tax-efficient strategies by making investments that drive a smaller tax percentage on returns and opt for tax-advantaged accounts.
Diversify your Portfolio
Fixed-rate debt securities are most affected by inflation. This is why experts recommend diversifying your portfolio to include assets that offer higher potential value to match an increase in inflation. It helps achieve long-term returns while carrying lower risk. You can consider different forms of assets such as real estate, gold bonds, mutual funds, crypto, and more.
Crypto SIPs are a new form of investment channel that allows you to make a fixed investment periodically toward purchasing a mix of cryptos. A well-diversified asset allocation will help derive better results to wade through the patchy waters.
Read more: How to Diversify your Investment Portfolio
Revaluate your Insurance Products
Insurance policies are a big part of our lives today. From health insurance to life insurance, the different products serve different purposes. However, ensure that the policies you stay in evolve with the changing times. Continue to invest in policies that bring value to your present and future.
Limit your Spends
Cut to the point, and limit your spending! In order to negate making unwanted spending that may rip you off your savings; you can follow the 50-30-20 rule. It is imperative to track your budget carefully and invest in purchases that matter. Do not get caught in a problematic spending habit.
Additional Read: What is the 50/30/20 rule of Budgeting?
Stay Informed on Inflation Trends
It is never easy to predict the outcome of inflation. This is why you must stay informed on inflation trends from the past and present. Look out for recurrent patterns and asset holdings that have continued to perform. Try to stay up-to-date with information to get through unprecedented economic situations.
Is Bitcoin a Hedge against Inflation?
‘Hedge against inflations’ is usually defined as an asset that effectively maintains its value against fluctuating prices. The times are uncertain and the US dollar continues to climb in value with new yearly highs. Experts emphasize the fact that Bitcoin continues to hold a greater edge over inflation. Over the long term, investors do not have to worry about its maintenance. The scarcity of Bitcoin protects its value to a certain extent, even during times of inflation. It is no wonder that ardent investors are growingly adding “hard assets” like crypto to their portfolios.
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How do you survive inflation in India in 2022?
Inflation can affect your budget and indeed disrupt your financial decisions. However, you can beat inflation in India by making wise investment decisions. Work on building a diversified investment portfolio by adding a good mix of asset classes like bonds, crypto SIPs, real estate and more. Do not over-allocate cash funds but do keep aside a robust emergency fund.
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