What Is Inflation and How Does It Affect Your Money?

If you ever wondered why the same amount of money can buy less today than it used to buy in the past, then you've been the victim of inflation. Although it's a natural phenomenon of any economy, very few people understand what inflation is, why it happens, and how it impacts their day-to-day life. The concept can be dull, but inflation has a very concrete effect on what your salary will actually get you, if your savings are decreasing or growing, and how sure you can be about your own financial future. An understanding of how inflation operates can help people make improved financial decisions and budget more effectively.

What Is Inflation?

Inflation is a term referring to prices of things that we see and notice around us rise over time. For instance, a few years ago a cup of tea would be sold for ₹10 but today it would be sold for ₹15 or even more. That implies that your money is losing its value since you will need more rupees to purchase the same products as before.

It's not tea alone — it affects everything, from what you eat to what you wear, from electric appliances to the rent you pay. So, unless your earnings keep pace with inflation, you'll be unable to pay for the standard of living to which you've grown used.

Inflation is inevitable in any economy. Inflation indicates that the economy is expanding, people are spending money, and companies are expanding — but your money doesn't go as far. A bit of inflation is actually a good thing because it stimulates spending and investment rather than individuals and companies sitting on cash. Too much inflation, however, is dangerous.

What causes inflation?

There are some general reasons why prices rise:

Demand Exceeds Supply: Whenever a large number of individuals are willing to purchase something but there's less of it, the sellers increase the price. For instance, when there was once a shortage of onions during a season, their price doubled over a fortnight.

Increased Production Cost: Whenever firms have to pay more for similar raw materials, electricity, or shipping, they just pass on the extra cost to the consumer. Thus if gasoline prices rise, you can bet your taxi fare and your grocery delivery will be more expensive.

Wage Growth: If workers are paid better, companies will be able to increase prices to pass on higher salary costs. It can continue in that vein unless productivity too increases.

Imported Inflation: We import so many goods and services today given the level of the world's integration. When prices increase in the countries we are importing from — be it oil in the Middle East or chips in Taiwan — then prices here go up accordingly.

Currency Depreciation: When the Indian Rupee depreciates against the US Dollar, then foreign commodities become costly, thus also causing general inflation.

At others, other things outside the economy, like oil prices or supply shocks — e.g., during the COVID-19 era — will cause prices to rise.

Types of Inflation

Inflation is not uniform. Some of the following types exist:

Creeping Inflation: This is incremental--and consistent--rising prices--usually 2-5% per year. It's natural and healthy and permits companies to plan and grow.

Walking Inflation: Faster than creeping inflation, it falls between 5-10%. It starts to influence the cost of living even more and has the potential to start worrying fixed-income earners.

Galloping Inflation: Prices increase at an extremely rapid pace, generally 10-20% or more. Keeping pace with even little spending becomes hard for the average person, and the economy starts to get strained.

Hyperinflation: A condition where the prices increase extremely rapidly, i.e., 50% or more over a month. It never happens very often and only normally in the very worst economic circumstances, e.g., Zimbabwe or Venezuela.

Stagflation: A worse situation where inflation is high but growth and employment are stagnant and also high. Policymaking is then difficult because solving one problem would worsen the other problem.

Knowing what kind of inflation is occurring assists policymakers and investors in determining how to respond.

How Inflation Affects Your Money?

When inflation goes up, your money is worth less. Suppose you have ₹10,000 in your savings account that increases at 4% per annum. But suppose inflation is 6%, your money is not as good for buying things. Your bank account balance is going up a little, but your buying power is less.

Following are some of the most important places where inflation affects your pocket:

Household Budget: Food, petrol, electricity, and travel expenses cost more and more each day. Some day in the future, you have to earn more or live cheaper.

Savings: Low-interest savings accounts fall behind inflation. Your money just stays as prices rise, effectively making you poorer.

Loans and EMIs: Higher inflation can prompt RBI to raise interest rates. If you hold a home loan or any other loan, that means higher EMIs for you.

Fixed Income Earners: Pensioners and others living on fixed income are hit hard as their income does not rise in proportion with higher expenses.

Investments: Various investments respond differently. Whereas equity markets may match or even surpass inflation in the long run, fixed deposits and bonds may trail behind.

Lifestyle Choices: Inflation may lead to lifestyle compromise, for example, delaying significant purchases, vacations, or even reducing healthcare costs.

What Is the Current Inflation Rate?

India's inflation rate is approximately 3.16%, as of April 2025. The inflation rate is computed using the Consumer Price Index (CPI) that measures prices of basic commodities and services in the nation.

The Reserve Bank of India (RBI) has an inflation band of 2-6%. It manages inflation by using tools such as the repo rate (interest rate at which it lends money to banks) in its ammunition. When faced with high inflation, it can increase interest rates to curb borrowing and consumption. When faced with low inflation, it can reduce interest rates to stimulate economic activity.

This balancing act needs to be achieved in such a way that price stability is ensured without controlling economic growth.

How to Protect Your Money from Inflation?

Inflation can be inevitable, but saving your money can be achieved smartly:

Invest in Growth Assets: In the long run, investment in equity mutual funds, stocks, property, and gold has always beaten inflation.

Start Early: The earlier you start investing, the more years your money has to grow and work for you by beating inflation.

Don't Keep Too Much Loose Money: You certainly do need to have some amount of emergency funds, but much loose money in a savings account doesn't earn much interest. Transfer excess money to liquid mutual funds or short-term debt funds.

Utilize SIPs (Systematic Investment Plans): They enable one to invest in mutual funds on a regular basis and minimize market fluctuations while generating wealth.

Include Inflation-Protected Bonds: The Indian government offers inflation-indexed bonds, which are adjusted for inflation.

Invest Across the Board: Do not put all your eggs in a single basket. Include a combination of equities, debt, gold, and real estate to minimize risks and enhance inflation resistance.

Review Periodically: Your objectives and inflation rates both evolve over time. Review and rebalance your portfolio no less than quarterly.

Through the utilization of a well-staggered technique, you'll be able to stop inflation from gradually taking your hard-earned money.

Conclusion

Inflation is this little-known word, but it straight up involves all of us in basic means — from what your grocery shopping is costing you to the worth of your savings.

Having some concept of what inflation is and how it works can take you far in saving your money and planning ahead. The next time you hear someone talk about inflation, explain to them it's not numbers; it's how much money gets you things you require.

For those looking to go a step further in planning their finances, platforms like Indiabulls Securities Limited can help. With their market insights, investment tools, and user-friendly platforms, managing your portfolio while being tax-efficient becomes a lot easier.

FAQs

Does inflation affect my savings?

Yes. If your savings are less than the inflation rate, then your savings lose value in the long run.

Is my money valuable in my savings account during high inflation?

If your rate of saving interest is less than inflation, then the money is losing its value. It is advisable to look for investments which appreciate at a rate greater than inflation so that you can save your money.

How frequently should I monitor my investments so that I am one step ahead of inflation?

Each year, check whether your investments are growing at a rate higher than inflation. If not, then check whether your portfolio requires realignment to safeguard your money better.

Do I invest in property or gold for inflation protection?

Both gold and property historically are good hedges against inflation but are subject to risks of price volatility and illiquidity. Diversifying among other classes of assets is advisable.

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