Inflation Calculator

Prices of goods and services increase over a period due to inflation. It is measured as the rate of change in prices of selected goods over time and indicates the decreasing purchasing power of money.

What is inflation?

Inflation is the measure of rate of change in prices of goods and services and indicates the rise in their price levels. Wholesale Price Index (WPI) measures changes at the wholesale level while the Consumer Price Index (CPI) measures price changes at the retail level.

CPI is a commonly used indictor to identify inflation and deflation of an economy. Indian economy replaced WPI with CPI to measure inflation in the year 2013. This index uses weighted average prices of 299 commodities to measure inflation.

Let us understand inflation with an example. Five years ago, the price of one liter of toned milk was INR 45, which has increased to INR 55 today. This change in the price of milk indicates the reducing purchasing power of the rupee.

What is an Inflation Calculator?

An inflation calculator is a tool that estimates the impact of inflation on the purchasing capacity and power of an individual. It shows the future value of your money after a certain period of time.

Again, let us use an example to understand how inflation calculator works. Assume you have INR 1 lakh today. Considering an inflation rate of 6% per annum, the future value of this amount after 10 years (in 2034) will be INR 1.79 lakh.

Continuing the example, assume that a product costs INR 10000 today. At 6% per year inflation, the product will cost INR 57435 after 30 years. An inflation calculator estimates the future value of money.

How is Inflation Calculated?

Inflation is calculated using the Consumer Price Index. It measures the change in the price of goods and services by using their weighted average value.

CPI = (Cost of Fixed Basket of Goods and Services in Current Year/Cost of Fixed Basket of Goods and Services in Base Year) *100

After calculating CPI for two consecutive years, inflation can be measuring using the below mentioned inflation formula:

Inflation = [(CPIx+1-CPIx)/(CPIx)]*100

CPIx is the CPI is the initial Consumer Price Index

How does Inflation Impact your Mutual Fund Investment?

Individuals save and invest their funds with the objective of accumulating wealth to meet their future financial goals. If an individual does not plan properly and overlooks to consider the impact of inflation on their investments, there is a possibility that they are unable to meet their financial objectives in the future.

Inflation not only impacts your purchasing power but also increases the amount needed in the future. Many people choose to invest their savings in bank fixed deposits. However, the rate of interest may not be enough to combat the rising inflation.

An alternative is to invest in mutual funds. These funds procure capital from multiple investors and the corpus is invested in different assets, such as bonds, equity, commodities, and other instruments. The corpus is professionally managed by experienced fund managers supported by a team of research analysts. They constantly monitor the market movements and modify the investments to maximize potential returns. When held over the long-term, mutual funds have the potential to deliver inflation-beating returns to meet your future financial requirements without much difficulties.