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The government aims to control inflation through Fiscal and Monetary policies. Therefore, the impact of inflation on a stock depends on the performance of the company. This will impact the profits of the business. However, companies also have to pay high wages and source raw materials at higher prices. When inflation is high, the economy is strong, and as a result, companies are in good business. However, the same returns after four years may not be enough to buy the same commodity.įor equity investments, the impact of inflation is mixed. The return that one gets this year may be sufficient to buy a commodity. For investments with a fixed annual return such as bonds and CDs, the same annual return may have the impact of inflation. Impact of inflation on investments majorly depends on the investment type. However, it may not help in completely offsetting the inflation loss. The interest may help in balancing out some effects of inflation. However, the purchasing power of the same INR 5,000 10 years later is less.Īn alternative to this is keeping money in a bank. This doesn’t mean that you are losing money. For example, INR 5,000 kept under your bed today is worth more than it is tomorrow. In other words, with time, it can reduce the value of savings. Inflation has an impact on the prices of goods, services, and commodities, etc. It not only reduces the purchasing power, but also increases the financial requirements for the future. If one does not plan effectively, in all probabilities, there is a very high chance for the money to shrink. The main goal of these savings and investments are to meet future financial requirements. Investors do savings and investments with an aim to grow their money. Purchasing power is when the same amount of money will buy less of a product as time passes. This is called the falling purchasing power of the currency. With the same INR 25, one can get only half a litre of milk in 2020. Now the same litre of toned milk costs INR 45 in 2020. A litre of toned milk used to cost INR 25 in the year 2010. Inflation can be better explained with an example. It calculates the price change of all these 299 goods and services by taking a weighted average value of each of them. CPI is determined using a basket of 299 commodities. The percentage change in CPI over a period of time is the inflation over that period for consumer goods. In India, the Consumer Price Index (CPI) replaced the Wholesale Price Index (WPI) in the year 2013 as a measure of inflation. While CPI measures retail level price changes (retail inflation).ĬPI is one of the most widely used indicators for identifying inflation or deflation in an economy. WPI measures wholesale level price changes. The measures of inflation are the Consumer Price Index (CPI) and Wholesale Price Index (WPI). Also, it shows the fall in the purchasing power of a rupee.
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In simple terms, it is a rise in price levels of goods and services of daily use. Inflation is a measure of the rate of change in prices of selected goods and services.