When we plan to save and invest for retirement, we often consider the value of money in today’s context. But the question is—will our money have the same value 20-30 years from now? Inflation gradually reduces the purchasing power of money, i.e., what seems cheap today may be very expensive in the future.
Inflation has a direct impact on the cost of our daily needs. Let’s understand from this example, the gas cylinder price was Rs 350 in 2010, but now it costs about Rs 1,050 in 2025 in some parts of the country – an average annual price rise of 7.6%. Similarly, in 2009, you could buy 2 litres of petrol for Rs 100, whereas today, with the same amount of money, you can buy only 1 litre. This shows that inflation has almost halved the power of money during this period.
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Inflation: Government data
The government uses the Consumer Price Index (CPI) to measure inflation. CPI data covers price increases in essential items like food, clothing, housing, transport, health, etc. India’s CPI-based inflation rate was 3.61% in February 2025, but it has averaged over 5% in the past years. The CPI inflation peaked at 12.2% in 2013 and fell to 1.5% in 2017.
The Reserve Bank of India (RBI) tries to keep inflation at a target of 4%, with a 2% flexible band on either side. But the real cost of essential commodities is often higher than the official figures released by the RBI.
Real vs nominal returns on investments
Traditional fixed income investment schemes such as bank fixed deposits, Public Provident Fund (PPF), EPFO, Post Office Savings and Sukanya Samriddhi Yojana (SSY) typically offer 6%-8.25% annual returns. After adjusting for inflation, the real returns from these investment products come to just 2-3%.
On the other hand, equity-linked investments, such as mutual funds, give slightly better returns. Historically, equity mutual funds have delivered annualised returns of as high as 12%-15%. But after taking inflation into account, the real returns of mutual funds come to 6-9%.
Inflation-adjusted retirement corpus calculation
Let us understand through an example how inflation erodes savings and money value over time.
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