:: SEBI Investor | Money matters: Inflation::

Inflation reduces the value of money, which means that with the same amount of money, you can purchase lesser amount of goods and services than before. This happens due to general increase in prices of goods and services. For example, at an inflation rate of 6 percent per annum, an item that costs Rs. 100/- now will cost Rs. 106/- next year.

The below chart shows how the value of Rs. 1,00,000 will diminish over a period of time (5 years, 10 years, 15 years and 20 years), assuming average inflation rate of 6%.

Individuals have little control over inflation. However, there are ways to reduce the adverse impact of inflation on personal finances by:

Prioritize spending and cutting unnecessary expenses
Diversifying your investments wisely in assets, which provides better returns than rate of inflation over the long term.
Focus on long-term investments that have historically performed well during inflation, such as equities, mutual funds, gold etc. Over the long term, it has been generally noticed that these assets provide higher returns than the rate of inflation

To know more about inflation, please watch the following video:

(i) What is Inflation?

Inflation: The General Increase in Prices