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What is Inflation? How does it affect the Common man?

Team MoneyWorks4Me Dec 02,2011 6038 2 min read

The reported rate of inflation for the month of October was 9.73%. The inflation rates have been hovering at a high level for almost a year now. Rising prices of domestic food, manufactured goods, and fuel are a few reasons why inflation has been so high.

A high inflation rate has a severe impact on society. No wonder than that the common man has been at the receiving end of the effects of inflation like never before. The RBI has been continuously raising interest rates in its bid to control inflation. This naturally means that any hopes of lesser interest rates vanish into thin air even before they materialize. All in all, it is a double whammy for the common man that he/she seems ill-equipped to handle.

Ironically enough, items such as mobile phones, laptops, and vehicles are more within reach than making the household budget fit. This is primarily due to an unprecedented hike in food prices. According to Parvati Kamble, a cook whose earnings amount to Rs. 4000 thousand a month, “There was a time I would save up to Rs. 500 a month, but daily expenditure has gone up so much that I am broke before the month is over.” The price rise in onions, potatoes, and milk, amongst other commodities, has no doubt contributed to her monetary woes.

The case of the onion in particular, has been causing for plenty of hue and cry in the past year. Bad climatic conditions had contributed to the poor produce, and this along with a high demand for onion gave rise to stupendous onion prices that had left the lay person aghast.

Also, eating out has taken a beating altogether. A frequent restaurant-goer and foodie in the past, Mrs. Anand now prefers to cook and entertain at home. “I’d rather have pot luck at home and spend an evening with friends rather than paying some ridiculous bill at a restaurant. Going out is no longer a satisfactory experience as the pinch on the purse far outweighs any culinary gratification one might aspire for!”

Let’s understand what actually happens to the economy during times of inflation. Inflation is caused due to increased demand or decreased supply or due to a combination of both. In a bid to control the effects of inflation, RBI hikes interest rates thus attempting to control the situation. However, this has its own side effects, because high inflation and rising interest rates also affect corporate profitability. Higher input costs lead to lesser production, eventually affecting the growth of the economy. The cumulative effects of reduced growth results in lowering the GDP of the country.

If inflation remains high household budgets is not the only thing that will be affected. In the long run, it is going to adversely affect the common man’s savings which are largely dependent on fixed income instruments. It looks like investors might have to settle for negative returns, considering that inflation rates have been consistently higher than provident fund rates (8.5%), small saving rates (8%), and bank deposit rates (less than 8%). With a grim scenario such as this facing the investor/common man, the avenue to explore is the stock market. Investing wisely in the stock market and with minimum risk is the common man’s best chance at beating inflation and increasing earnings exponentially. But that is the subject of another article, keep watching this space.

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Team MoneyWorks4Me

A team of business leaders, equity research analysts & investment counsellors. Started in 2008; experienced in equity research, financial planning and portfolio management. Passionate about providing institutional quality research and advice to Retail Investors in a simple easy-to-understand-and-act manner.

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Warning: Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

Disclaimer: Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provides any assurance of returns to investors.

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