Inflation - The hidden enemy

CA Nitesh Buddhadev , Last updated: 09 May 2018
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Just the other day at lunch we all colleagues were discussing our school/college days and one of my seniors said they had only Doordarshan on tv while juniors discussed about Nickelodeon, Hungama and so on. Seniors were nostalgic about the Vada Pav they had in break time for Rs 5/- and juniors were boasting about burgers in Mc Donalds.

Just then it hit me that inflation as generally understood by people is the simple equation of change in the price of a commodity over the years viz. Vada Pav costed Rs 5/- in 2005 and it costs Rs 15/- in 2018.

There is also concept of Lifestyle Inflation which most of us are unaware of. Simply, Lifestyle inflation means that the youth of yesterday were having Vada Pav for Rs 5/-, today we could get that for Rs 15/- but Today we do not want to have Vada Pav. We want to have Burger starting from Rs 50/-. This increase in cost due to jump from Vada Pav to Burger is termed as Lifestyle Inflation.

Here, simple inflation is only 8.82%the (difference between Rs 5 and Rs 15 for 13 years) but for us inflation is way higher i.e. 19.38%the (difference between Rs 5 and Rs 50 for 13 years).

Now, the concept to understand here is that when we plan our finances we have goals like Children Education, Children Marriage, Retirement, Foreign Holidays etc. Generally, people recommend to consider inflation but tend to ignore Lifestyle Inflation.

Statistics show that normally, Household expense doubles every 5 years due to CPI and Lifestyle Inflation. If you do not plan your finances well, you will have a huge gap in your income and expense.

Let's assume that you kept Rs 100 in your locker in 1990 and today you take that Rs 100 note and you want to spend it for your household needs. Do you know the purchasing power of that same Rs 100 note would only be Rs 15?

Now, Let's assume that your monthly household expense is Rs 25,000 and after understanding somewhat about savings and investments you keep Rs 25,000 in Fixed Deposit today in 2018 and you want to spend it for your household needs after 15 years in 2033. Do you know that you will have a huge gap of approx Rs 1,28,000 between your fund inflow and outflow (not considering Taxation).