Finance

A beginner’s guide to inflation-Things You Should Know Before Investing

“Inflation has peaked,” The RBI examines the inflation forecast. “The government intervenes to reduce inflation” You may have noticed any of these headlines recently addressing Inflation, a term that is sometimes used with trepidation, has a big effect on both the economy and your pocketbook. But what is inflation exactly?

What is Inflation and What Does it Mean

A few years ago, we could buy something for Rs. 10, but it now costs roughly Rs. To buy the same number of goods or services as previously, you need more money.

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In other words, there is a widespread increase in the cost of goods and services while the purchasing power of money has decreased. This phenomenon is known as inflation. In India, the rate in April 2022 was 7.79%.

Why Does it Happen?

Prices for goods and services increase when there is an imbalance between supply and demand, when there are increases in distribution or production expenses, such as labour, raw materials, etc., or when taxes are raised. As a result, the currency is affected, which lowers the worth of money. This explains why purchasing the same item over time costs more money.

The continuous COVID pandemic and external factors like wars like the one between Russia and Ukraine also have an effect on the economy and, consequently, inflation.

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How Does it Affect You

You will have to pay more as the cost of products and services rises, which has an effect on your personal budget. In order to continue enjoying the same goods and services you are currently, you will need to earn more money.

Your quality of life will be impacted by inflation since buying the same food, visiting the same locations, and engaging in all the same activities you did at the beginning of the year will cost much more by the end of the year.

A modest amount of inflation of about 2% or 3% is beneficial for the economy, despite the fact that it is typically discussed as being negative. At this point, consumers will continue to borrow more money and make more purchases, which lowers the interest rate.

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How is Inflation Calculated?

The Consumer Price Index (CPI) and the Wholesale Price Index (WPI) are the two indices used to quantify inflation and examine the impact of inflation on normal consumers. Along with items that are sold in bulk to vendors and merchants like oil and beans, expenses like those for food, healthcare, education, and other necessities are taken into account. The most important factor in determining inflation for the average person will be the CPI.

For CPI, 260 goods are taken into account. To keep track of price changes, sample product prices on a monthly basis are taken into consideration.

For the WPI, 697 commodities are taken into account, including goods like power, manufactured goods, and fuel. Each month, the Ministry of Commerce and Industry calculates the aggregate price to produce the WPI.

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How to Combat Inflation

There are ways to financially safeguard yourself and your family, even if inflation can severely disrupt your day-to-day existence. The rupee is currently depreciating, and prices are rising everywhere for all goods and services.

Either you either make enough money to outpace inflation (which may not be realistic for everyone), or you must invest your savings in a way that does.

Because the rate of return is lower than the rate of inflation, experts urge people not to rely only on programmes like RDs/FDs or park their money in savings accounts. Due to the hazards involved, most of us have been trained to save rather than invest, yet over time, saving will not allow you to survive.

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Consider options like equities and mutual funds, as well as real estate, gold, and cryptocurrency if you can. Although these solutions are undoubtedly riskier than conventional savings plans, the returns will be larger, and conventional plans won’t do anything but cause your assets’ value to decline over time due to the low interest rates.

Conclusion

Inflation is typically associated with some sense of anxiety and dread, but if one can manage it on a moderate scale, it can be advantageous for both the nation and consumers. However, if it spirals out of hand, it may negatively impact your daily costs.

Always strive to make investments with high yields and be frugal with your spending.

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