Human beings are a little funny. They love inflation and they hate inflation.

First of all inflation is “the general increase in prices”. So when your favorite Udipi raises the cost of Rava Masala dosa from Rs. 150 to Rs. 175, it is not inflation. It is ‘price increase in dosa’. This maybe offset in the price FALL in the clothes that you buy. So one price rise (fuel) could be offset by a fall (vegetables). Thus inflation could be tempered, and not ALWAYS rising, in ALL the commodities that you use. That is also ‘consumer’ inflation. This we hate.

However we expect our salary to go up – in fact keep going up. How will this happen? If we bought a bottle of water for Rs. 25 in 2017, and we paid Rs. 30 in 2018, it means ‘water’ prices went up by 20%. This is an asset that you bought and USED. To maintain the same standards of consumption, we need to buy the same thing, maybe at higher prices. This is an ASSET that you bought and finished it. Rs. 30 went to another person, and he used it elsewhere.

However we love inflation (or what we think) when it affects our INCOME as well as when it impacts our ASSETS. We want the prices of our ASSETS to keep going up. In the place where I live, I can assure you over the last 3 years there is no change in real estate prices. NO CHANGE AT ALL. Yes if you have bought an asset to live, it really does not matter. If you sold a dog and bought a cat, again no problem – which means real estate in one place and real estate in another place – again it does not matter. However, if you had sold equities like say Hdfc bank or Mindtree, you have a right to feel bad.

So this inflation that we like – Asset price inflation – we like selectively. We like inflation in the assets that we like and we do not like inflation in the assets that we want to buy. Like people telling me “I want to buy Asian paints and Hdfc, but their prices are too high”. Hey it cannot get low JUST BECAUSE YOU WANT TO BUY, right?

We want the sensex to keep going up year on year. Great, that is asset price inflation, right? We want a 18% cagr on our equity portfolio. Is it really possible? If you see from inflation point of view, this is almost impossible – OBVIOUSLY a big portion has to come from increasing sales, better cost control, more margins, etc.

If the asset price inflation (actually price rise, because Nifty could be going up and RE may have come down) is backed by demand and prosperity, it is good for us. However we want the asset prices (of assets we keep for a long time) and asset prices (of assets we consume immediately – food, etc.) to remain constant while our income levels are increasing.

Tough call.