What is Inflation?
Inflation is the rate at which the general level of prices for goods and services rises, causing purchasing power to fall. In simple terms, the same amount of money buys fewer things over time.
The Reserve Bank of India (RBI) targets to keep inflation at 4% with a tolerance band of ±2% (2-6%). India's average inflation over the past decade has been around 5-6%.
How Inflation Affects Your Money
At 6% inflation: 72 ÷ 6 = 12 years for prices to double
- Purchasing Power: ₹1 lakh today at 6% inflation = ₹55,839 value in 10 years
- Future Costs: Something costing ₹1 lakh today = ₹1,79,085 in 10 years
- Savings Erosion: If your FD gives 6% and inflation is 6%, real return = 0%
Inflation Formulas
Purchasing Power = Future Amount / (1 + Inflation Rate)^Years
Real Return = ((1 + Nominal Return) / (1 + Inflation)) - 1
Impact on Different Goals
| Goal | Cost Today | In 10 Years | In 20 Years |
|---|---|---|---|
| Child's Education | ₹25 Lakh | ₹44.8 Lakh | ₹80.2 Lakh |
| House Purchase | ₹1 Crore | ₹1.79 Crore | ₹3.21 Crore |
| Monthly Expenses | ₹50,000 | ₹89,542 | ₹1,60,357 |
| Retirement Corpus | ₹5 Crore | ₹8.95 Crore | ₹16.04 Crore |
*Assuming 6% annual inflation
Investments That Beat Inflation
| Investment | Avg Returns | Real Return (6% inflation) |
|---|---|---|
| Savings Account | 3-4% | -2% to -3% |
| Fixed Deposit | 6-7% | 0% to 1% |
| PPF | 7.1% | ~1% |
| Gold | 8-10% | 2-4% |
| Equity Mutual Funds | 12-15% | 6-9% |
Frequently Asked Questions (FAQs)
Why is 2025 inflation so low in India?
India's CPI inflation dropped to record lows (0.25-1.5%) in 2025 due to sharp fall in food prices, especially vegetables. This is temporary and not expected to sustain. For long-term planning, use historical average of 5-6%.
What is the difference between CPI and WPI inflation?
CPI (Consumer Price Index) measures retail prices and affects consumers directly. WPI (Wholesale Price Index) measures wholesale prices. RBI uses CPI for monetary policy. CPI is more relevant for personal finance planning.
How much should I save for retirement considering inflation?
If you need ₹50,000/month today and retire in 25 years (6% inflation), you'll need ₹2.14 lakh/month then. Use SWP calculator with inflation-adjusted corpus for accurate retirement planning.
Should I invest in debt funds if they barely beat inflation?
Debt funds provide stability and liquidity. Use them for short-term goals (1-3 years) and emergency funds. For long-term wealth creation (5+ years), equity is essential to beat inflation significantly.
How does inflation affect my home loan?
Inflation actually helps borrowers! Your EMI stays fixed while your income rises with inflation. A ₹50,000 EMI feels lighter in 10 years when your salary has doubled. This is why real estate is considered an inflation hedge.