Inflation

Personal Finance

Inflation is the rate at which the general price level rises over time, reducing the purchasing power of money. In India, inflation is measured by the Consumer Price Index (CPI) and has averaged 5-6% annually over the past decade.

In detail

Inflation is the silent destroyer of wealth. Rs 1 lakh today buys the equivalent of only Rs 55,839 worth of goods in 10 years at 6% inflation. This is why keeping money in a savings account at 2.7% or an FD at 7% (post-tax 4.9%) barely preserves purchasing power.nnRBI's mandate: maintain CPI inflation at 4% (+/- 2%). The Monetary Policy Committee uses the repo rate as the primary tool -- raising rates reduces money supply and spending, cooling inflation.nnFor planning: always express retirement goals in future rupees. Rs 50L needed in 2040 is approximately Rs 1.26 Cr at 6% inflation.

Formula

Future value needed = Present value x (1 + inflation rate)^years Purchasing power erosion = Present - (Present / (1+r)^n) Real return = [(1 + nominal return) / (1 + inflation)] - 1 Example: 12% investment return at 6% inflation: Real return = (1.12/1.06) - 1 = 5.66%

Real-life example

🇮🇳 India example

A family spending Rs 60,000/month today will need Rs 1,07,460/month in 10 years at 6% inflation. Their retirement corpus must account for this future expense, not today's expense -- otherwise they will run out of money decades before expected.

Frequently asked questions

Which investment beats inflation in India? ▼
Equity mutual funds (Nifty 50 CAGR ~12% over 20 years) have convincingly beaten 6% inflation after tax over long periods. Real estate in major cities has roughly matched inflation. Gold is a reasonable long-term hedge. FDs typically provide zero to minimal real returns after tax.
What is the current inflation rate in India in 2025? ▼
CPI inflation in India has moderated to approximately 4-5% in 2024-25, down from the elevated 6-7% levels of 2022-23. Food inflation remains somewhat higher. For long-term financial planning use 6% as a conservative inflation assumption.