CPI Inflation trend and how it has impacted your expenses and savings

In one of our previous post, Are your investments generating real returns?, we highlighted the importance of focusing on real returns and what impact inflation and taxes can have on your savings.

In this post, we will focus more on the actual inflation numbers that we all are being subjected to in India in the immediate past and over long term.

From an individual perspective, CPI (Consumer Price Index), which measures price movements in finished goods and services that are available for retail consumption, is a better and effective measure to know the health and growth of our savings vis-a-vis WPI (Wholesale Price Index) which measures price movements in intermediate stages of unfinished goods and services.

Chart below depicts CPI Inflation trend in India over 25 year period on a trailing (immediate past) as well as rolling (long term averages) basis based on last 56 years of CPI data upto Nov-2013.


In hindsight, CPI inflation has been close to double digit over the last decade which is translated into significant increase in inflation-led household/living expenses along with major devaluation of individual’s accumulated savings.

Table below illustrates the impact of inflation on 1,00,000 as expenses and savings over the last decade
Trailing Duration Trailing Avg. CPI Increase in Expense Devaluation of Money
Last 1 Year 11% 1,11,000 90,090
Last 3 Years 10.40% 1,32,014 75,750
Last 5 Years 10.40% 1,64,000 60,975
Last 7 Years 9.60% 1,89,965 52,641
Last 10 Years 8.10% 2,17,000 45,893
as on Nov-2013

Above illustration clearly shows how compounding is already working against you in the form of inflation and it cannot be avoided and is applicable for every individual.

Increase in inflation-based expenses is something that is unavoidable, however, devaluation of your hard-earned savings is certainly in your control and depends on what asset-allocation and investment avenues you have selected.

If you have left your hard-earned money in Savings A/c or holding it in cash or used traditional saving instruments like FDs, RDs etc… with the mindset of capital protection, you are certainly impacted the most, especially if you are in 20% or higher tax bracket.

On the other hand, if you would have considered Mutual Funds as investment instruments with right asset-allocation and product selection based on your time-horizon situation would have been certainly very different:

For upto 3 years time horizon right selection of Debt Mutual Funds (Money-market, Bonds) would have resulted in much lesser devaluation of your money vis-a-vis traditional saving instruments liked Saving A/c, FDs etc.   know more >>

For 5~ 10 year time horizon right mix of Equity/Debt based asset allocation using Mutual Funds would have not only preserved but have also grown your hard-earned savings in real terms.

What’s the way forward?

Certainly, double-digit CPI inflation experienced in last decade is expected to moderate but going to be sticky at around 7 ~ 8% as per long-term rolling averages over last 56 years.

These long-term rolling averages can be reasonable good inputs to plan for any medium-to-long term future financial needs.

Right asset-allocation based on your needs, accumulated savings, future cash flow situations and your tolerance for volatility is a MUST for every individual to manage and beat inflation consistently over medium to long term and Mutual Funds are one of the best investment instruments that can help to achieve the same with right guidance and right execution.

Do you want to Manage your Money Smartly across time-horizon with Superior and Predictable Risk-reward proposition?

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