Inflation is a hot topic in India and around the globe, and for good reason. It's a serious economic issue that can profoundly affect the overall economy. The widespread financial consequences of inflation can also impact individuals like you. Therefore, it's crucial to understand what inflation is and how its effects could potentially alter your life.
Inflation is the rate at which the price of goods and services increases. It primarily impacts a consumer's purchasing power. It is usually easily noticed as a marked rise in the buying prices of daily-use items like food,, clothing, transport, consumer durables, etc.
Inflation is assessed by examining the average price changes of goods and services over time. A specific year is designated as the base year, which serves as a reference point for calculating the percentage increase in prices. This percentage, in relation to the commodities, is commonly referred to as the rate of inflation.
The impact of inflation on the economy, and in turn, you, is as follows:
Purchasing power refers to how much you can buy with a single unit of currency. With inflation, as prices of goods and services increase, you will have to spend more to buy the things you need. Thus, your cost of living increases.
Since most people tend to have fixed incomes, inflation can impact savings, too. You save a smaller portion of your income as you spend more of your funds on goods and services.
During inflation, there is an increase in the money supply. Thus, banks must curb borrowing to reduce the money circulating in the economy. They do so by increasing interest rates, resulting in a scarcity of money. So, you might find availing and paying off a loan more expensive during high inflation.
Inflation only widens the gulf between low and high-income individuals. Low-income households end up spending more money to acquire daily necessities. On the other hand, wealthy families may already own assets that may tend to be profitable during inflationary periods.
Since prices of goods and services increase, people tend to stock up before the value of their money reduces even more. This protective measure causes people to spend more than they would under normal economic circumstances.
Due to increased money supply and stockpiling of goods, there is a spike in the country's economic growth. However, this boost is temporary and is curbed through countermeasures such as higher interest rates.
In order to counter inflation and its effects, many individuals and businesses turn to non-liquid assets like gold, real estate, stocks, and even collectables like wine. These assets have traditionally outperformed inflation, with their values rising more quickly than everyday goods and services. However, investing in these assets during inflation can be costly, as their prices tend to surge alongside inflation.
While inflation can drastically impact your life, you can take measures to protect yourself. Invest in instruments that can help you hedge against inflation, such as Mutual Funds. With HDFC Bank, you can invest in various Mutual Funds and choose from many affordable options to suit your financial goals.
To get started with Mutual Funds, click here.
Read more on why Mutual Funds make an excellent investment option for beginners by clicking here.
*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.