Inflation can be one of the biggest hindrances in our overall financial planning process. In this article, we will look at how different types of inflation impact your financial planning from time to time.
Wholesale or headline inflation is measured based on the changes in wholesale price index (WPI). The WPI can be very useful to the government in order to anticipate any rise in prices well in advance since the index is based on wholesale prices. However, wholesale inflation has lost its relevance over the years. This is largely due to the decision of the government to change the frequency of performing review of the index, which was on a weekly basis earlier to monthly basis. This led the RBI to shift its monetary focus from wholesale to retail inflation.
Retail inflation is measured based on changes in the Consumer Price Index (CPI). An average investor can benefit from CPI in terms of making relevant financial planning decisions. This is largely due to the fact that CPI calculates the impact of price rise. People living in big cities and metros can use the urban variant of CPI whereas those living in villages, towns, and small cities can use the rural variant of CPI.
Food inflation is a subset of headline inflation. In 2014, food inflation rose appreciably owing to the deficit in monsoon rains experienced across India. Food inflation is a major concern for a highly populated and emerging country such as India, which has a high number of people living below the poverty line. Thus, it becomes vital for investors to factor in food inflation into their overall financial planning process.
In the last decade, a lot of Indians have experienced and are still experiencing a constant improvement in lifestyle due to consistent increase in income. This increase in lifestyle is typically characterised by things such as a luxury apartment, branded shopping, luxury car, costly perfumes, and other lifestyle related items.
The important thing to note here is that the additional expenses incurred by an individual due to lifestyle improvement results in creating lifestyle inflation. Therefore, we must remember that the increase in expenses is not just because of rise in commodity and other prices. It is also due to the improved lifestyle of an individual. Since the concept is based on each individual, it is not easy to generalise lifestyle inflation and make it applicable to all.
Nevertheless, any individual must keep an eye on lifestyle inflation while drawing long-term strategies such as planning for retirement, children’s education, and children’s wedding.
We must remember that although education inflation is a subset of headline inflation, it only calculates the increase in education and stationery costs. Therefore, it becomes important to factor in this inflation while drawing up plans for your children’s education, especially given the rising costs of international courses and studies. This will keep you equipped with the right amount of funds when you need them for your children’s studies.
Medical inflation is one of the rare types of inflation, which is decently under control in India. This is largely due to the fact that government poses restrictions on drug price rise and technological innovation in order to control medical equipment costs. Nevertheless, medical expenses are always bound to rise, going forward. As you start growing older, you would not want to face financial problems owing to basic medication, which you will need at that time. Thus, you will have to factor in this inflation into your financial planning for a smooth retired life.
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