The Ugly Truth About Actual Inflation Rate

A few days back, RBI notified that India’s consumer inflation is around 6%. That doesn’t hurt much. After all, you are getting more than that in your bank FDs @ 8%. Isn't it?

But don’t jump to conclusions quickly. Think about it for a moment. Does RBI notified inflation of 6% mean that all your expenses in the last one year have risen by just 6%? We don’t think so. And neither should you.

Have a look at this expense report shared by a 29-year-old friend who lives in Bangalore with his wife. It gives a good picture of the annual change in expenses for him.

*We compared monthly average expenses of our friend for Jan-July period over 2015 and 2016. Read more: Track Expenses - How to Know Where Your Money Goes?

Now it's obvious that the prices of all things won’t rise uniformly. So every expense head has its own % increase. But have a look at that number in the bottom right corner.

9.7%

That is the actual inflation (combined for all expenses) – at least for this person. And it is nowhere close to what RBI says, i.e. 5% to 6%. So now when someone asks you what is the inflation rate in India? You know that just quoting the RBI provided figures won’t be helpful. The real inflation that you and we (who have different expenses like maybe school fees, medicals, etc.) face, might be even higher!

Do this exercise yourself and you will know.

So the point to understand here is that every person has his own unique inflation number. And sadly, it's much more than what the government claims it to be. And if you compare this 9.7% inflation with the money kept in FD earning 8% before taxes you know that you are actually losing money every day.

Caution – Looking at post-tax figures (3^rd column below) can be horrifying.

Let us take another example of how inflation and taxes join forces to hurt you:

Suppose you kept Rs 1 lac in FD at 8% p.a. return last year. You earn an interest of Rs 8,000 on that FD. But there comes the taxman. Let's say you are in 20% bracket. So 20% of your interest income (i.e. Rs 1600) is taken away as taxes.

Post-tax Interest = Rs 6,400

Total Amount (at FD maturity) = Rs 1,06,400

But inflation too was increasing the cost of goods in the last year. So something that cost Rs 1 lac last year, would now cost Rs 1,09,700 (if we consider our own estimate of ‘real’ inflation - 9.7%).

Rs 1.06 lac < Rs 1.09 lac

The result is that you cannot buy that thing, which costs you Rs 1 lac last year - because the returns earned (after taxes) are not enough to compensate for the increase in prices (inflation). This is happening to each and everything you buy today. The costs are going up and will continue to do so.

You can either reduce expenses (Which is tough. We know) or invest in financial instruments that can provide you with inflation-beating returns.

There is no point blaming the government for not addressing the causes of inflation in India. Do what you can do for your own self. Inflation is a dirty word and it will continue to remain so. What you need to do is to find your own personal inflation number and then invest to beat that number.

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