Inflation is an inevitable part of the economy, and its impact on our purchasing power is often underestimated. Inflation is typically around 6% annually. This means that the cost of goods and services increases by about 6% annually. But what does this really mean for you and your savings?
What is Inflation?
Adhil Shetty, CEO of Bankbazaar.com says, “In simple terms, inflation is the rate at which prices of goods and services increase over time. It erodes the purchasing power of your money, meaning that what you can buy today with a certain amount of money will cost more in the future. For example, think about the price of your groceries or petrol five years ago and compare it with today’s prices – they’ve increased, right? That’s inflation in action.”
The Impact of 6% Inflation on Rs 50 Lakh
Let’s say you’re eyeing a property, a luxury car, or a high-end investment that costs Rs 50 lakh today. If inflation holds steady at 6%, you’ll need almost Rs 90 lakh to purchase the same item in a decade. Here’s why: inflation compounds over time, causing prices to increase year after year. So, something worth Rs 50 lakh today will not just cost an additional 6% after ten years; rather, it will be worth about Rs 90 lakh due to compounded inflation.
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Here’s a breakdown:
Inflation Calculation on Rs 50 LakhYearEffective Price (₹)050,00,000153,00,000256,18,000359,55,080463,12,385566,91,128670,92,596775,18,151879,69,240984,47,3941089,54,238
After ten years, Rs 50 lakh will become Rs 89.54 lakh – nearly double the original cost!
Example: Buying a House
Let’s say you’ve been dreaming of buying a house worth Rs 50 lakh in India. But, if inflation continues to rise at an average of 6% per annum, then ten years from now, that same house could cost you nearly Rs 90 lakh.
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