WE all can work out our basic expenses based on how much we spend currently, but to plan for the future, we need to factor in inflation or the rate of price increase. On the face of it, India experiences a modest inflation. But that perception is quite misleading because India is possibly one of the few economies where policymakers focus on the wholesale price index rather than consumer prices. This is why even when headline inflation figures slipped into the negative zone a few months ago, prices of essential commodities and the cost of living never really fell. In fact, it rose in line with retail inflation, which was much higher at 12%.
How Does Inflation Affect You?
Transportation, dining, movies, phone bills, electricity bills comprise a substantial portion of your budget and move in tandem with inflation. These are regular expenditures which will push up your monthly outgo. Other less recurring expenses include education and healthcare, which are highly vulnerable to inflation. It's estimated that the education fees and charges can witness an annual increase of 10%. Similarly, the share of healthcare expenditure in the personal consumption basket has also increased from 4.8-6.5% in the last one year, largely due to medical inflation.
Food Prices — The Domino Effect
Prices of vegetables, rice, wheat and pulses have turned extremely volatile, thanks to extreme weather conditions. This in turn has lowered the farm output and pushed up food prices. Most restaurants and cafes have pushed prices by up to 25% to account for the rise in food-fuelled inflation. The food price inflation rose to 19.95%, the highest in 11 years for the week ended December 5, 2009.
Lifestyle — A Growing Concern
Don't forget to account for lifestyle inflation, which is a growing concern today and is much higher than the published WPI figures. Simply speaking, it indicates the rise in your lifestyle expenses with the passage of time. Lifestyle inflation can increase even if the published headline inflation figures are not soaring. For example, you would have been content to watch movies in an ordinary movie hall a few years ago. However, with hefty pay hikes and higher disposable income you've received over the years, you would have now upgraded to multiplexes. The concept of lifestyle inflation was not prevalent earlier as the income growth was usually 5% over and above the inflation. The scenario has changed now. An individual's income growth is pegged at a minimum of 10% in excess of the inflation. So the affordability is much higher, resulting in people giving in to aspirational and peer pressures.
Reducing the impact of lifestyle inflation is all about smart spending. For instance, you don't have to travel to Europe when the whole world is visiting it at the same time. You can watch a movie after two weeks from the release date. Opt for a Sunday morning show or a weeknight show to save on ticket costs.
Inflation & Investments
Inflation doesn't even spare investments. Idle cash lying in your savings account loses value if inflation is higher than the 3.5% savings rate. Similarly, even as fixed deposits, PPF or NSC assure safe returns, they are not capable of beating the inflation. Real estate, gold, and equity are considered good hedges against inflation on a long-term basis.
