Inflationary Woes

My house help yesterday asked for a salary rise citing the increasing prices as the reason. It then struck me that inflation is actually now affecting at the grass-root levels. Inflation in India has been historically measured as the percent change in the wholesale prices as opposed to the world which measures the price change in consumer prices. Thus the trickledown effect of the price increase is lagged in this part of the world. Inflation since the start of this financial year has been close to double digit levels. In October the inflation was 9.73% as compared to the October of last year; which means that as compared to last year, prices on an average have increased by 9.73%.

Most of this price rise has been attributed to imported inflation in the form of oil imports and food inflation. Increasing rural incomes and standard of living has pushed up the overall domestic demand. The rural economy is generally doing well, (with a good monsoon season and a good harvest) and higher disposable incomes are increasing demand for food and white goods. As demand increases, prices increase in the short run as supply does not catch up with demand.

While on one hand a ‘comfortable’ level of inflation implies that the economy is growing; a high level of inflation might give mixed signals to investors. A comfortable level of inflation is the threshold level (decided by the central bank of a country; for India that level is 5%) of inflation that is targeted not to cross. Inflation reduces the value of your money; thus every marginal increase in your salary may not equal any value addition!

So how does one hedge one’s income in such an inflationary scenario? Well, for starters, start investing from the day you receive that first salary check! (Sounds too ideal, but trust me folks, life is a bed a roses only till your dad foots all your bills!!). Now before I start sounding too idealistic or pessimistic, let me say that I did not invest my first salary check either! However, I do believe in investing wisely now.    

Trust me, when I discussed this investment bit with my house help, she gaped at me for a long time, and finally (after much thinking) told me, “So it’s settled then, Rs. 100 more this month onwards…”