What is Inflation? How It Affects Your Savings and Investments
That plate of biryani that cost Rs 150 five years ago now costs Rs 250. Your electricity bill has doubled. And forget about buying a house at prices your parents did. This silent erosion of your money's value is called inflation, and it's arguably the biggest threat to your financial security that most people ignore.
What is Inflation?
Inflation is the gradual increase in the prices of goods and services over time. When inflation rises, each rupee you hold buys a little less than it did before. In other words, it's the decline in purchasing power of money.
Simple example: If inflation is 6% annually, something that costs Rs 100 today will cost Rs 106 next year. Your Rs 100 saved in a drawer will buy less next year.
How Inflation is Measured in India
Consumer Price Index (CPI)
The primary measure of inflation in India. It tracks price changes of a basket of essential goods and services including food, housing, healthcare, transportation, and education.
Wholesale Price Index (WPI)
Measures wholesale-level price changes. Used more for manufacturing and industrial sectors.
India's Current Inflation (2025-26)
India's retail inflation has moderated significantly:
- December 2025: 1.33% (up from 0.71% in November)
- FY 2025-26 average: Around 1.8%
- RBI's target range: 2-6%
This unusually low inflation period has been beneficial for consumers, though it may not last indefinitely.
Why Inflation Happens
1. Demand-Pull Inflation
When demand for goods exceeds supply. More money chasing the same amount of goods pushes prices up.
2. Cost-Push Inflation
When production costs increase (raw materials, wages, fuel), businesses pass these costs to consumers.
3. Monetary Inflation
When the money supply grows faster than economic output. Too much money in circulation reduces its value.
4. Supply Chain Disruptions
Events like pandemics, wars, or natural disasters can restrict supply and push prices up.
The Real Impact: How Inflation Erodes Your Wealth
Your Savings Account is Losing Money
If your savings account earns 3.5% interest annually and inflation is 6%, your real return is -2.5%. Your balance increases in rupees, but your purchasing power decreases.
10-Year Example:
| Scenario | Amount |
|---|---|
| Initial savings | Rs 10,00,000 |
| After 10 years at 3.5% interest | Rs 14,10,000 |
| Purchasing power needed (6% inflation) | Rs 17,90,000 |
| Lost purchasing power | Rs 3,80,000 |
Fixed Income Suffers Most
Fixed Deposits, bonds, and pension income lose real value during high inflation periods. Retirees on fixed pensions are particularly vulnerable.
How Inflation Affects Different Investments
| Investment | During High Inflation | Inflation Protection? |
|---|---|---|
| Savings Account | Loses real value | Poor |
| Fixed Deposits | May give negative real returns | Poor |
| Equity Mutual Funds | Historically beats inflation long-term | Good |
| Real Estate | Prices tend to rise with inflation | Good |
| Gold | Traditional inflation hedge | Moderate to Good |
| PPF/EPF | Rates adjusted periodically | Moderate |
Strategies to Beat Inflation
1. Invest in Equities
Historically, the Sensex has delivered 12-14% average annual returns over the long term. Even after 6% inflation, that's 6-8% real return. Start with low-cost index funds like Nifty 50 if you're new to investing.
2. Diversify Your Portfolio
Don't put all your money in one asset class. A mix of equity, debt, gold, and real estate provides both growth and stability.
3. Don't Keep Excess Cash Idle
Keep only 3-6 months' expenses as emergency fund. Put the rest to work in inflation-beating investments.
4. Consider Inflation-Indexed Products
Products like Sovereign Gold Bonds offer protection against inflation while providing additional interest.
5. Increase Your Income
Develop skills, seek promotions, or create side income. Your income growth should outpace inflation.
6. Avoid Long-Term Fixed Rate Products
During uncertain times, avoid locking money in long-term FDs. Opt for shorter tenures or floating rate products.
Understanding "Real Returns"
Real Return = Nominal Return - Inflation Rate
| Investment | Nominal Return | If Inflation is 6% | Real Return |
|---|---|---|---|
| Savings Account | 3.5% | 6% | -2.5% |
| Fixed Deposit | 7% | 6% | +1% |
| PPF | 7.1% | 6% | +1.1% |
| Equity Mutual Funds | 12% | 6% | +6% |
Inflation Planning for Life Goals
When planning for future goals, account for inflation:
- Child's education in 15 years? That Rs 20 lakh cost today could be Rs 50+ lakh
- Retirement in 25 years? You'll need 3-4x your current expenses
- Dream home in 10 years? Factor in 6-8% annual price increase
Access Liquidity Without Derailing Your Inflation Strategy
Your equity mutual funds are working hard to beat inflation. Don't sell them prematurely when you need cash. At DhanLAP, our Loan Against Mutual Funds (LAMF) lets you:
- Keep your inflation-beating investments - Don't redeem during temporary cash crunches
- Get quick liquidity - Often same-day disbursement
- Pay competitive interest rates - Much lower than personal loans
- Flexible repayment - Repay when convenient
Final Thoughts
Inflation is the silent wealth destroyer that never sleeps. The only defense is ensuring your money grows faster than prices rise. This means moving beyond traditional savings accounts and fixed deposits to a diversified portfolio that includes equity exposure.
Remember: The goal isn't just to save money - it's to preserve and grow your purchasing power over time. Every rupee you keep idle is losing value. Make your money work as hard as you do.
