Inflation is making you poorer. Here's how you can fight back

Consider this: Rs 1 lakh ten years ago is now worth just Rs 59,500. That's a little over 40 per cent decline in value in the last decade, based on CPI numbers.

You can blame the weakening of the rupee's purchasing power on inflation.

What is inflation?

Inflation refers to the steady rise in the prices of goods and services over time, causing the purchasing power of your money to decline.

For example, if inflation is 6 per cent, an item costing Rs 100 today would cost Rs 106 next year. While this difference seems small, inflation accumulates over time and can significantly impact your wealth.

In short, inflation works as reverse compounding. Just as compounding helps grow wealth when you invest, inflation silently reduces the value of your money when it's left uninvested.

Why personal inflation could be higher than national inflation

The government data recently pegged December's inflation data at 5.22 per cent.

However, this number is the national average based on price changes across various goods and services.

Your personal inflation, meanwhile, could be higher (or lower) based on the following three factors:

• Spending habits: If a larger share of your spending goes towards categories like healthcare, education or luxury goods, your inflation rate could be much higher than the national average.
  
• Location: Urban areas often face higher inflation due to costlier services and lifestyle choices compared to rural regions.
  
• Lifestyle choices: Someone spending more on premium products and services will experience higher inflation than someone focusing on essentials.

How inflation affects your investments

Inflation doesn't just impact your daily expenses; it affects your savings and investments, too.

If the return on your investments is lower than the inflation rate, your real wealth diminishes over time. For example, if you have a fixed deposit (FD) earning 5 per cent interest and inflation is at 6 per cent, you're actually losing purchasing power despite seeing your money grow on paper.

This is why beating inflation is essential for wealth preservation and long-term financial success.

How to beat inflation: invest in equities

The most effective way to stay ahead of inflation is by investing in equities for a long time. Here's why: historically, Indian equities have delivered annualised returns of 12-14 per cent, significantly outpacing the average inflation rate of around 6 per cent.

In other words, if your investment earns 12 per cent and inflation averages 6 per cent, your real return (wealth growth) is 6 per cent.

Key takeaway

While inflation is a silent wealth killer, you can fight back with the help of equities.

Although equities can be volatile over the short-term volatility, they have historically outpaced inflation and remain the most effective tool for long-term wealth creation.

Also read: Saving tax and creating wealth need not be separate goals

This article was originally published on January 14, 2025.