What is inflation and why does it matter?

If you keep Rs 100 locked in a box and do not open it for a year, the money will still be there. [caption id=“attachment_2561914” align=“alignright” width=“300”]  Image Courtesy: Canara Robeco[/caption] However, during this period, prices of consumption goods will have risen: what cost Rs 100 a year ago may probably cost ten or fifteen rupees more this year. This is the impact of inflation. Because of inflation money doesn’t keep its value. Inflation eats away your savings, bit by bit. Historically, inflation in India has varied , but has rarely fallen below 5% per year for a sustained period. The long-term average over this entire period is about 8%, which means that something that costs Rs 100 at the beginning of a year, would cost Rs 108 a year later. This many not sound like a lot, but inflation is persistent and has an impact year on year on year etc. So much so that, if you have set aside Rs 1 lakh 30 years ago and assuming an annual inflation of 8%, it would be worth about Rs 12,500 now. That is a decrease of 87.5%! Inflation is an important reason to consider investing instead of just saving. The interest you earn on your savings might not be high enough to beat inflation. The idea is to invest in instruments that over a longer period of time beat inflation. This will help you to at least retain the value of your hard-earned cash!

KEY POINTS

• Inflation is the increase of prices of consumption goods over time.
• Inflation thus erodes the value of the money you have today.
• Saving, but more importantly, investing could help in generating a return that will beat inflation and thus maintaining or even growing the value of your money over time.

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