Everyone is talking about inflation in India and across the world for good reason. Inflation is a severe economic phenomenon that can significantly impact the economy. The extensive financial after-effects, can also trickle down to affect individuals like you. So it is vital for you to be aware of what inflation means, and how its effects can potentially change your life.
What is inflation?
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 measured by taking a look at the average price change for commodities over a period of time. A specific year is used as a base year for calculating the percentage of rising inflation. This percentage in reference to the commodities is also known as the rate of inflation.
What are the effects of inflation on the economy?
The impact of inflation on the economy, and in turn, you, is as follows:
Reduction in purchasing power:
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.
Drop in savings:
Since most people tend to have fixed incomes, inflation can impact savings too. As you spend more of your funds on goods and services, you end up saving a smaller portion of your income.
Increased interest rates:
During inflation, there is an increase in the money supply. Thus, banks have to curb borrowing to reduce the money circulating in the economy. They do so by increasing interest rates, resulting in a scarcity of money. So, during high inflation, you might find availing and paying off a loan to be more expensive.
Increases income inequality:
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.
Boosts spending:
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.
Short-term economic growth:
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.
Increased asset rates:
To combat inflation and its impact, many individuals and businesses invest their funds in non-liquid assets like gold, real estate, stocks, wine, etc. Such assets have historically outpaced inflation, and their prices have gone up faster than those of goods and services. Thus, if you plan to invest in such non-liquid assets, you might have to shell out a considerable sum during inflationary periods.
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 a wide range of 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 makes 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.