Moneycontain inflation calculator helps you to find the real rate of return on your investments as well as tell you your current expenses value in future time. Without considering inflation rate on investments you made in any financial instrument such as stocks, commodity, mutual funds, FD, RD etc., you can’t get the correct picture.
Therefore it becomes important to know the inflation adjusted rate of return, instead of doing manual calculation you can use below inflation calculator and get an estimation on how much you need to earn, save, invest for your future.
To use the inflation calculator you just need to enter your current expense, enter the expected inflation rate (%) for the time period and tenure in years, that’s it. You will get the answer of how much expense you will have in future accounting the inflation rate. So go ahead and checkout by using the below inflation calculator.
Now that you have used the inflation calculator it is very much important for you to know the details about how, why, when inflation makes impact. If you are really serious about your future investments than do read the complete post as it contain answers of all your questions.
You can also use the table of contents to directly switch to the answer you are interested.
In addition to this i have also tried explaining many complex jargons used in financial world in easy way. Just to let you know the post will be little long but it’s worth reading and understanding. So, let’s go ahead and understand the deep facts about inflation, economy, investments etc.
What Is Inflation?
In simple term inflation refers to the increase in the prices of regular or everyday use goods and services like food, grocery, clothing, land, housing, medical care, education, electronics etc.
High inflation results in higher cost of living which leads to de-growth of a economy, this also shows the decrease in purchasing power of any country currency.
In other words as prices rise due to inflation, the value of the currency declines as its purchasing power choke with each increase in the price of basic goods and services.
Having said that, a moderate inflation is still required in order to make sure people do not hoard money under their mattress and expenditure is encouraged.
Check out the below image to understand example of inflation in simple words:
One need to understand “time value of money” as money loses its value over time, investing becomes important. Investing make sure a sustainable economic growth of a country and overall.
Therefore as an normal person or an investor you should know the (TMV) “time value of money” the value of money does not remain the same across time.
Meaning, the value of Rs.10000 today is not really Rs.10000 3 years from now. Oppositely, the value of Rs.10000 3 years from now is not really Rs.10000 as of today.
Whenever there is motion of time, there is an element of opportunity. Money has to be accounted or adjusted for that opportunity as in case inflation is that element.
Due to inflation, the value of money decreases over time. For example if you have kept Rs. 1,00,000 with you as idle for 5 years instead of investing, assuming an inflation rate of 7% per annum the value of your money will be reduced to Rs.71,299 in percentage terms its 28.70% decline overall.
This is also known as discounting which factors in the rate of inflation impact on the future value of money in present terms. Hence one should know how inflation wipeout the large part of your saved money as well as investments.
Below infographic representation shows you how inflation have impact on your life as well as investments across different asset class.
As you can see the value of Rs. 1 lakh after 20 years declines to Rs.25,842 assuming a inflation rate at 7% per annum. If you convert this in percentage terms it is down by 74.16% due to inflation.
Now, check out the below image to understand how inflation make a great impact even on your investments across different financial instruments such as Equity, SIP, FD, RD, Commodity & even real estate.
But before we understand more about the effects of inflation on you and economy it is crucial to know, how it gets calculated? who do this calculation? how does real return gets calculated? and lot more other questions in detail.
Who Calculate Inflation?
Although there are different independent authorities or government bodies in every country by certain name who calculates inflation, however if we talk about India it is measured by the Ministry of Statistics and Programme Implementation measures inflation (MOSPI) which is a central government authority in charge of adopting measures to ensure the smooth running of the economy.
How Inflation Is Calculated?
The formula to calculate the rate of inflation is very straightforward, it gets calculated using the Consumer Price Index (CPI) data, let us first know in brief about the same as it was not always the case specially in India.
First of all there are two types of indices that are used to measure inflation
- Wholesale Price Index (WPI)
- Consumer Price Index (CPI)
What is Wholesale Price Index (WPI)?
Wholesale Price Index (WPI) measures the prices at the wholesale level, it consist of price of a group of wholesale goods. This basket or group has 697 items into account and shows the combined prices. In other words the goods or services sold by big businesses to smaller businesses for selling further is captured by the WPI.
Further the basket gets categorized into three groups:
Manufactured Products (65 percent of total weight)
Primary Articles like food, etc. (20.1 percent)
Fuel and Power (14.9 percent)
But here is the twist WPI was used by the Reserve Bank of India till 2014 to make its monetary policy after that under the present government and ex-governor Raghuram Rajan it shifted to Consumer Price Index. Reason being is because it fails to provide services and blockages between a wholesaler and a retailer.
Whereas worldwide or for most of the European countries CPI has always been used to gauge the inflation.
What is Consumer Price Index (CPI)?
Consumer Price Index (CPI) captures the change in prices at the retail level, CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc.
It is based on 260 commodities including specific services. The prices of sample goods and services are piled up time to time generally every month by the Ministry of Statistics and Programme Implementation (MOSPI).
If the average price of all goods and services in the CPI were to go up 4% over the previous year’s level, for example, then inflation would also be fixed at 4%. This also means that the purchasing power of the currency such as rupee would have declined by 4%.
What Is Base Year In Inflation Calculation?
A base year is taken to compare the measure of rates, it is taken as first year or the beginning level while comparing with another time period. In India the base year of CPI was changed to 2012 from 2010, this was also changed for WPI and IIP (Index of Industrial Production) to 2012 in April this year. So when comparing the inflation 2012 is the base year for this decade.
Now, coming back to the calculation of inflation rate below is the formula used to calculate the inflation.
Inflation = (Ending CPI level – Beginning CPI level) / Beginning CPI level *100
Checkout the below image, i have taken a snapshot of last year October 2019 as the beginning value and august 2020 as the end value to calculate the inflation rate during this time period of 11 months, which came about 5% Approx.
Great, now that you know how to calculate inflation rate let us see how to get the real interest rates or in other words inflation-adjusted rates.
How To Calculate Real Interest Rate?
Many people make a mistake of calculating the inflation adjusted or real interest rate, what they do is just subtract the nominal interest rate by inflation rate and think it as correct way of doing it.
For example :
Let say the average inflation for last 5 years is 4.5%, you made a investment which gave you nominal interest of 15%. When you subtract 15-4.5 = 11.5%, now this is the very basic way of doing the calculation to know inflation adjusted returns or real returns on your investment.
As inflation and returns compound, the correct way or formula to calculate real returns is given below:
Inflation-adjusted return = (1 + Return) / (1 + Inflation) – 1 *100
Applying the formula by using above no.
(1+15%)/(1+4.5%) -1 *100= 10.04%, this is correct return you should expect on your investment post inflation. You can get the inflation rate from here for India.
Example Of Inflation-Adjusted Return:
Let us suppose you purchase a stock on January 1, 2020 for Rs.50,000 now at the end of the year, on December 31 2020, you sold the stock for Rs. 65,000. As you have invested in a good company they also gave you dividends of Rs.3000 within investment period.
Assuming the Consumer Price Index (CPI) was at 148 at the beginning of the year, on December 31, the CPI was at a level of 154, let us calculate the nominal returns you earned first then we will calculate the inflation rate during the period and finally the real return.
1. The first step is to calculate the investment’s return which can be done using the CAGR Formula:
Return = [(68000/50,000)^(1/1)]-1= 36% by the way you can use moneycontain cagr calculator instead of manual calculation for ease.
2.The second step is to calculate the level of inflation over the period using the following formula:
Inflation = (Ending CPI level – Beginning CPI level) / Beginning CPI level *100 = (154 – 148) /148 *100 = 4% (percent)
3.The third step is to calculate the real interest rates by removing the inflation rate using the following formula:
Inflation-adjusted return = (1 + Return) / (1 + Inflation rate) – 1 *100 = (1+36%)/(1+4%)-1*100 = 30.7%
As mentioned above inflation and returns compound, therefore it is necessary to use the formula in step three.
If an investor simply takes a basic estimate by subtracting 4% from 36%, he arrives at an inflation-adjusted return of 32%, which in this example is 1.3% high.
I hope now the concept of calculating the correct return or real returns on your investment is clear, let us now focus back to causes of inflation, impact on individual person and investors.
Why Inflation Happens?
Although there is not a specific thing which causes inflation however some of the main reason of inflation or rise in prices are listed below:
- Due to high demand and low production or supply of multiple commodities, there is a demand-supply gap, which ultimately leads to a rise in prices.
- Surplus or extra circulation of money also leads to inflation as money loses its purchasing power. If a central bank quickly increases the money supply without simultaneously increase in the production of goods and service. Demand overtake supply, leading to an increase in prices.
- When people have more money, they also tend to spend more, which causes increased demand of goods and services and if the supply of these goods are not intandem then it also leads to hike in inflation.
- Apart from this there is something called cost-push inflation, this happens when there is sudden rise in production prices of commodities. This make the price of final products getting increased.
- Other than this any natural, artificial calamities, war or even a pandemic such as coronavirus may force the inflation.
The above points are some of the reason and all, a rising crude oil prices or increase in wages for laborers or workers can also triggers the inflation.
How Inflation Affects Your Investments?
The the amount of money you have as savings or you make stays the same then with time it will buy you less due to inflation. Inflation have a negative impact on your purchasing power, or the amount of goods or services your money can buy therefore it is always advisable to make investments as early as possible in your lifetime.
If you want the money to keep pace with inflation investing is the first and foremost thing which can save you.
Having said that most people focus on the risk of losing money while investing. They often get surrounded by negative thoughts, such as “If I invest money on something now, it may go down or even give negative return. However very few people look at the destruction of wealth by Inflation itself.
Let us see the type of financial instruments or asset that you can use to invest and how the inflation have effect on them and what can be done to be at the winning side.
Investing In Bank Deposits:
In country like India Fixed deposits have a special place in people heart, they assume it as the safest place on earth to park in all the money they have. What they forget is bank fixed deposits suffer badly due to inflation.
Inflation erodes the value of your savings. Let us understand this with an example.
For instance, you have made a fd of Rs. 500o in your account. If you receive an interest of 7%, your savings would become Rs. 5,359. In the same period, if inflation rate is 7.5%, price of an item which was Rs. 5000 earlier would become Rs. 5,385 now.
In spite of the growth in your investments, you have to spend more due to the increase in inflation. It can also be said as negative rate of return. The real return you get from investment is reduced due to inflation.
By the way you use moneycontain fixed deposit calculator to know the value of the lump sum money you would receive in future here.
To defeat inflation, you can invest in bonds instead of FD, which is issued by government that are adjusted to inflation risks or instead of putting all eggs in one basket you should diversify the investment to other asset class such as mutual funds, equity etc.
SIPs are one way of averaging market volatility, especially in falling markets as the same quantum buys more units of exposure.
This does not mean at all not to invest in FD, but at the same time you should have an eye on inflation and do tactical strategies to overcome it instead of just seeing the value of your investments getting eroded by the inflation.
Investing In Commodities:
Commodities such as gold and silver has always been a center of attraction not only for investments but as an traditional ethics in India. Which is good at one hand as these have always been used as hedge against inflation. When the value of currency decreases, commodity can be a safe heaven as its happening currently in 2020.
You may also invest in gold ETFs as well. Having said that if you see the overall average gold returns its been between 5-12% moreover unlike a stock or a bond, it generates no cash flows in the form of profits, dividends, or interest income and time duration required for a commodity to give better return are higher, therefore when you count inflation in your returns it is still less comparing to other class of assets.
How to Beat inflation?
There are many ways of investments that can surely help you best inflation most importantly in long terms. No one can ignore inflation but one can always plan and invest in the suitable investment at the same time also diversify investment to beat inflation.
Start investing in stocks/mutual funds:
Investing in equities or stocks is one of the best methods to overcome inflation. You can also invest in SIP’s (Systematic Investment Plan) for a longer time period that will help in fighting market volatility and inflation as well.
Investors choose index fund such as nifty 50 index which purchase all the stocks in the same proportion as in a nifty index to invest because of less risks involved, that’s why the return is moderate, however if you invest in good stock (fundamentally), the return would be much bigger. As an example:
MRF shares have generated multi fold returns for the investors over the years.
If an investor had invested Rs 1 lakh in MRF shares 25 years ago, the corpus would have been worth Rs 74.02 crore in April 30, 2018 when the stock was its peak.
Even 1 share costed Just Rs.11 in the year 1993 which at the peak (2018) was around Rs.81,423.
As you can see in the image above nifty next 50 index as well as nifty50 as given better returns compare to FD, Commodity. Strong fundamental companies can also provide you the same return and even more than this over the period time.
However for a beginner in stock market it is always advisable to first invest in funds through SIP or lumpsum instead of direct investment. Once you gain enough knowledge by reading and understanding the framework of stock market you can do the investments on your own as well.
Inflation is like rot which with each passing year it slowly erodes your purchasing power as well as makes a hole in your savings and investments.
Tax Free Returns:
Apart from greater returns than other assets investing in equity mutual funds are also tax free if held for more than a year. Since the returns become tax free over the long-term it also gives you higher average returns.
Diversification Is Easy:
When you are investing in stocks or mutual funds you can diversify across various types of instruments. For example, in case of stocks, you can diversify based on size – large cap, midcap and smallcap; While large caps are low risk investments, small cap stocks carry high risk.
Similar to this there are low risk – high returns funds and vice-versa.
How Accurate Is Moneycontain Inflation Calculator?
For all kind of calculator that you see on moneycontain website, each goes through a accuracy check to make sure the values you get after entering the fields are correct. Hence, I make sure to compare the results with prominent banking websites, this i do because there are lot of websites I have seen personally showing the wrong results.
That is why it is important when we talk about the money to have a check with big banking websites, therefore i have attached a snapshot of another future expense or inflation calculator from HDFCBANK.COM, you can check the calculation with similar values below and rest assured.
How Inflation Impact Borrowers and Lenders?
We learned above under the causes of inflation that one of the reason can be the rise in the wages of labors or workers if that is the case people who take loans such as home loan or personal loan or borrow money in any other form and if there is increase in inflation with wages, I mean increment in the salary and the loan has already been taken then it benefits the borrower.
This happens because the borrower still owes the same amount of money, whereas they are making more money in their paycheck to pay off the loan. As a result the loan interest remain same for the borrower whereas indirectly the lender interest becomes lesser.
Now suppose there are high inflation rates but the wages have not increased, people around the world can’t stop spending the money especially something they really want due to this they may borrow money in different forms such as loan, credit cards etc.
This creates a great opportunity for the lenders across the market by adding new borrowers to the list. For example suppose you want to buy a new two-wheeler which was costing Rs.70,000 before inflation rise however after inflation the price of the same motorcycle comes to Rs.75,000 now the lender makes more money as the interest earned on financing the loan at Rs.70,000 at a interest rate of 12% is lesser when comparing it with Rs.7,5000.
In addition to this paying extra Rs.5000 will require more time to pay-off so more profit
Another point is when the prices of things rises due to inflation but not the wages than the cost of living get increased and with the same amount of earning people may avoid to pay off the money borrowed by reducing their current EMI’s amount which help lenders to earn even more as the time period get increased with lesser EMI’s.
How Inflation Impact GDP?
Economic growth for any country is measured in gross domestic product (GDP). GDP in simple terms means the total value of all finished goods and services produced in a specific time period.
When authorities produce their GDP number they account the inflation, the percentage of growth or decline, compared to the previous year, is adjusted for inflation. Hence if growth was 8% and inflation was at 3.5%, then GDP would be reported at 5.5%.
I hope you have completely understood the concepts behind inflation and have used the inflation calculator to know the future expenses. Understanding of inflation in life makes you better at spending, investing, saving at correct time. So make sure and planned the things accordingly to be at better position than others, not only for you but for your family and children.
Use moneycontain CAGR calculator which is really helpful while choosing the correct funds or when you make any investments in future.
In case you want to know how much you need to save every month to reach your financial goals check out Moneycontain Monthly SIP Calculator with inflation here.
If you are looking for making an RD recurring deposit than do check best banks in India with Highest rD returns and calculate the value of your RD Moneycontain free RD calculator .
Money does not remain equal throughout time , with time the value of your money changes, what i mean to say the 100 bucks you have in your pocket can’t have the similar value after 5 years, therefore it becomes utmost importance for you to know, how much will be your saving or investments worth after certain time have passed.
Want to learn about stock market step by step than do read this amazing stock market guide designed specifically for beginners to clear the concepts in easy language.
You can also check my reviews on best brokers in India here:
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Note: Please do not take this as any recommendation, to trade or invest. This is just for reference, to make you understand more about the inflation calculator and its importance, under no circumstances intended to be used or considered as financial or investment advice, a recommendation or an offer to sell, or a solicitation of any offer to buy any securities or other form of financial asset.
Please do your own research and make investment. Moneycontain will not be responsible for any of your losses at all. The point made is for educational purpose only. All investments are subject to risks, which should be considered prior to making any investments.
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