Inflation Survival Guide – What inflation means to the common man in India

by India-Reports on March 5, 2010

in economy in transition, Future Growth & Global Transitions

Inflation in simple terms is the decrease in the value of the currency held, i.e., being able to buy less for the same amount of money – a decrease in value leading to an increase in the prices of goods and services. Inflation has been affecting households and companies alike, be in the form of increase in prices of goods and services or be it in the form of decrease in the value of the currency held. While other economic indicators like GDP (Gross Domestic Product) growth rate, trade balance, government debt etc have an indirect impact in terms of the broad outlook and future strategy of households and companies, inflation has a direct impact on the day-to-day activities of these entities. To a common man, inflation means a rise in rents, rise in food prices, decline in value of currency, increase in interest on loans and negative returns on term deposits!

For example, an investor who invests Rs.10,000 in a fixed deposit with annual return of 5.0% in an economy with annual inflation of 6.0% loses the value of the cash since his/her cash at the end of the year can buy less number of goods and services ,i.e., the terminal value at the end of the year is Rs.10,500 while the price of basket of goods worth Rs.10,000 at the beginning of the year would now cost Rs.10,600. This leads to a negative return on terms deposits.

Similarly, a rise in rents and food prices, including essential groceries, could hurt the common man’s ability to sustain in the periods of high inflation without an increase in the wage or salary levels.

To get a further insight into the effects of inflation on the common man and the ways to tackle it, refer to the following PPT on inflation.