Your household inflation may be very different from the actual rate of inflation and how it impacts your finances

Updated: 23 Oct 2022, 12:30 PM IST

RBI is telling you that inflation is 7.4%. But (let’s say) you did some exercise as illustrated above and found that your personal inflation is 11%.

A customer and vendor exchange Indian rupee banknotes in Bengaluru, India, on Monday, Aug. 15, 2022. India�s�wholesale�price inflation due Aug. 16 would show price gains easing to 13.75% in July, from 15.18% the previous month, according to a separate survey as of last Friday. Photographer: Samyukta Lakshmi/Bloomberg

You need to be living in a cave on a remote island, to not feel the pinch of rising prices these days. Inflation is all around us. And the prices of almost everything have been rising. RBI’s latest figures (in Sept 2022) tell that it is around 7.4%. This has been almost 9 months since the inflation has been above RBI’s tolerance of 6%.

I am sure that like most Indians, you too would be feeling the pinch.

But does it mean that all of us are experiencing similar price rises?

Does it mean that every person’s expenses are witnessing inflation of 7.4%?

The answer is no.

Prices of different products/services increase (or if you are lucky, decrease) at different rates. And we all have quite different expense baskets.

Let’s take 2 examples and this will be clear.

Different people, different inflation

Suppose there are 2 friends. One of them is unmarried while the other one is married to a wife (who is a homemaker) and has 2 kids in school

Here are their annual expenses and the inflation that each expense experiences individually:

Annual expenses and the inflation that each expense experiences individually

I am sure you would have noticed that both families have quite different expense buckets and each expense in itself faces different levels of inflation.

So, while RBI will tell you that a country's overall expenses are witnessing inflation of 7.4%, the fact is that common people experience their own individual inflation. Like in the above examples - 11% and 17.1%.

Please don’t think that what the RBI is saying is wrong. They are talking at an aggregate and average levels for 1.4 billion Indians. But what an individual might experience is and will be different.

You should carry out a similar exercise yourself to see how price-rise has changed things for you.

So, RBI’s published inflation figures may not be the same as your personal inflation.

Impact of Inflation

RBI is telling you that inflation is 7.4%. But (let’s say) you did some exercise as illustrated above and found that your personal inflation is 11%.

What this means is that not only have expenses increased for you, but also that if your savings and investments are earning less than 11%, then basically you are losing money, or more specifically, your purchasing power.

So, money parked in bank FD at 6% or PPF at 7.1% isn’t helping you fight inflation. There are no assets that can give you a guaranteed 11% (which is your personal inflation). But at least, equity has the potential to generate 10-15% returns in the long term.

So, unless someone is an extremely conservative saver, everyone should consider having some exposure to equity in their long-term savings and investment portfolio.

One can always start small to gradually get acquainted with the vagaries of equity, volatility and return profile before increasing their allocation. But at least those who are young and in their 20-30s, should make sure to start investing in equity. And the best way to do it is via equity mutual funds.

Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.

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First Published: 23 Oct 2022, 12:30 PM IST