Inflation

Inflation is the sustained increase in the general price level of goods and services in an economy. When inflation rises, each unit of currency buys fewer goods - meaning your ₹100 today will purchase less next year than it does now.

In India, inflation is primarily measured by the Consumer Price Index (CPI), published monthly by the Ministry of Statistics and Programme Implementation. The Reserve Bank of India (RBI) targets CPI inflation within a band of 2%-6%, with a midpoint target of 4%. The RBI's Monetary Policy Committee (MPC) adjusts the repo rate (the rate at which RBI lends to banks) to manage inflation - raising rates to cool inflation, lowering rates to stimulate growth.

For investors, inflation erodes nominal returns. A fixed deposit earning 7% in a year of 6% inflation produces only a 1% real return. This is the arithmetic behind treating equities - which have historically delivered 12-15% annualised returns on the Nifty 50 over long periods - as an inflation hedge that tends to outpace the rising cost of living.

Different asset classes respond differently to inflation. Equities generally benefit from moderate inflation because companies can pass higher costs to consumers. Fixed-income instruments like bonds lose value as inflation rises (because existing low-rate bonds become less attractive). Gold and commodities often rise with inflation, behaving as hedging instruments.

Inflation shapes retirement planning arithmetic. A household spending ₹50,000 per month today at average 6% inflation needs approximately ₹1,60,000 per month in 20 years to maintain the same lifestyle. This is why financial planners express goals in inflation-adjusted terms.