One of the most important things to know while planning your finances is of course inflation. NO. Not many financial planners can help you with that figure. Wonder why? Well it will take some reading. Bear with me.

Inflation is relentless. It is like facing the West Indian bowling attack of the 1970s. There were 4 of them bowling at an amazing speed and an army of fielders willing to convert half chances!

We have had tepid inflation – here I mean headline inflation – over the past few years. The last 4 years of NaMo rule has seen extremely low inflation thanks to low oil prices. Hello, that is history. The USA with its best friend Saudi wanted to keep Russia in check, so they let prices fall. Now the largest 2 producers want prices to go back up..and so it will.

Government’s way of calculating inflation is different from what you think is inflation.

The government calculates how the buying power of the Rupee changes (using the latest Statistics) and inflation information provided in the Consumer Price Index (CPI)) and publishes those figures every month. It compares the difference in that buying power from this year to last year and comes up with the inflation number.

When you see the government reports – it is boring – you will hear terminology like Core inflation. Core inflation is the basic inflation – AND IGNORES FOOD AND ENERGY!

You will also hear terms like disinflation, hyper inflation, stagflation, recession, recovery, depression – and since you can Google all these words, and this is a personal finance blog (not an economics blog) I am not describing it for you. Request you to learn about these words too. It helps laughing at financial media for misusing these words!!

PROBLEM IS IN THE UNDERSTANDING THAT WE HAVE:

The Govt has data collection points who collect information on goods and services providers across the country. They actually collect a sample of more than 6000 items and this is updated on the monthly CPI AND WPI. However, when it comes to your own persona financial situation, these numbers CANNOT BE ACCURATE for our specific case. For example the CPI may not include spending habits for people living in rural areas. I know of people who use barter. Imagine a carpenter using the services of a computer supplier. Or a doctor using a financial planner. Such things do not get captured. Or you are living in Rural India where you may not incur expenses like parking charges.

Some will tell you that inflation of 5.0% is a good thing. Some might say that incomes  are on the rise for the first time in two decades (or whatever), housing prices have come down from the record inflated rates of just a decade ago, and the capital market has set all-time highs this year. For some people this may be really good news. But for many others, those who are living on a month to month basis, are unemployed, have un-indexed incomes, are retired, etc. – and those who cannot save for retirement, low inflation is not much of a solace.

So in personal finance what do you REALLY need to know about inflation?

1. It is an unending monster out to destroy your portfolio.
2. you can calculate YOUR PERSONAL inflation ONLY by keeping track of your expenses
3. once you have the data regarding your expenses see what is the inflation applicable to you
4. When I did this exercise with a few friends…their numbers ranged from 10% to 19% !!!