Protecting the pocket: The impact of inflation and how we can fight it

A Rs 50 note given by grandparents brought us an exorbitant amount of joy in the form of a basket of toffees and cookies. Today, the same note is incapable of buying the same basket. It is due to the weakening purchasing power of money over time, which is called inflation. 

Inflation is a burning global issue in the current macroeconomic scenario, given the geopolitical crisis, supply-chain disruptions, trade sanctions, volatile exchange rates and of course, the aftermath effects of the COVID-19 pandemic. 

The central banks of several developing and developed economies started ratcheting up the interest rates as part of their monetary policy to reign in inflation and balance it with economic growth. Not just nations, individuals also have to mull over protecting their pockets given the severity of economic issues due to daunting inflation — financial wealth of individuals and fiscals of the nation.

Inflation that indicates macroeconomic instability deteriorates the trade bill. It hinders industries from efficient utilisation of resources and thereby optimal production. This leads to costly inputs and raises the question of industries’ sustainability in the competition. 

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The heat of increasing inflation is not only felt by the economy at large but also by the individuals that resort to savings from their earnings. Inflation, however, silently enters our pockets and eats up the hard-earned monetary wealth saved with transactional, speculative and precautionary motives.

This raises an alarming question: ‘How to protect the pocket?’ The article addresses this pertinent question in two ways: 1) Ways to save money and 2) Ways to grow money.

It is said that we must know our ‘enemy’ before fighting the war. It is true in the case of fighting inflation as well. Keeping an eye over monthly released inflation numbers makes us aware of the current state of our currency. 

With this, we can evaluate our existing wealth as well as the cost of planned investments in ‘real’ term. The term ‘real’ refers to the value of nominal wealth adjusted by inflation. Constant monitoring of retail and wholesale inflation numbers also helps us speculate on the changes in the interest rates induced by RBI’s monetary policy that typically increases interest rates to contain inflation. 

An increase in interest rates implies an increase in the cost of EMIs on the one hand and an increase in interest earned on savings in the bank on the other. Unfortunately, the former is higher than the latter; hence, high inflation and subsequently high-interest rates hit our pocket. 

It is always a wise decision to plan spending and investments as per inflation readings to mitigate the brunt of inflation.

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By its very nature, inflation depreciates the actual value of the money at hand. For instance, if the savings interest rate in bank is about 3 per cent in the present scenario and inflation rate is about 6 per cent, the ‘real’ interest rate would be -3 per cent that is, 3 per cent subtracted by 6per cent. 

This implies that the speed of growth of our money in the bank is unable to match the speed of depreciation of money in the market and thus resulting in net depreciation or devaluation of money. In other words, despite planned savings, we are losing our money daily in the real term due to inflation if the rate of return on investment is less than the inflation rate. 

This calls for an obvious solution: To opt for such an investment plan that provides us more rate of returns than the rate of inflation. Financial innovations in the banking system provides us with innovative options these days, such as flexi-fixed deposit (FD), wherein higher returns than saving account returns are expected to hedge against inflation, however, to a limited extent.

More than the financial products provided by the banks, there are plenty of investment options available for individuals, like mutual funds, stock options, national pension schemes, etc. However, each of these investment options has its own merits and demerits in terms of risks, returns and tax implications. 

Individuals must vet these options judiciously and invest to hedge against inflation accordingly.

Inflation is not only the measure but also the driver of uncertainty. High inflation forms the fear of future inflation and associated uncertainty among individuals. Such fear thwarts prudent investment decisions and leads to panic buying or hoarding of stocks by individuals and industries. Lack of investment and stock hoarding have adverse consequences on the economy. 

Subdued investment decelerates industrialisation and, thereby, the growth of employment and the economy. Whereas panic buying and stock hoarding add to an uptick in inflation due to short supply against inordinately high demand. Together, subdued growth and increasing inflation drag an economy into a ‘stagflation’ scenario that most of the economies face of late. 

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Thus, individuals, as well as industries, need to calibrate the inflationary scenario critically and accordingly address the ‘fear’ of inflation uncertainty.

As India is one of the largest and fastest growing economies with strong fiscals, long-term investments are always welcome here. Such long-term and strategic investments mostly yield a good return in the long run. 

As individuals, we must rely on India’s robust supply chain and avoid panic buying and stock hoarding. In addition, by relying on domestically manufactured products and avoiding imported goods, we can mitigate the ‘imported inflation’ and build more reliance on our economy.

Since inflation is a macro phenomenon with an impact at the micro level, judiciously calibrated decisions taken at the micro level can help contain the inflation at the macro level. 

Inflation is not always a villain. Instead, inflation at a moderate level is desired in the economies, especially in developing ones like India. 

It is required to incentivise the producers, attract investments and thus drive the economy. Hence, prudent control over inflation help the nation as well as individuals protect their pockets and grow sustainably.

Views expressed are the author’s own and don’t necessarily reflect those of Down To Earth

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