Measured by the Wholesale Price Increase Index (WPI), inflation indicates the broad-based level of prices of goods and services in an economy. Little wonder then that the figure is crucial to both economists and policy makers.
Ideally, if salaries increased at the same rate as inflation, there would be no hardships. Unfortunately, inflation is not an across-the-board price increase. Prices of different commodities increase at different rates at different times, affecting different sections of the population.
With the government set to announce inflation data for August 2012 today (14 September 2012), these five facts will guide you through how inflation affects the common man.
1) Purchasing power of the rupee falls -- a Rs 50 note, which you could use to buy a kilogram of rice, will now fetch only half a kilogram.
2) Commodity wholesaler dealers, such as rice dealers at mandis, may try and hoard essential commodities like food grains on hopes of reaping profits when prices increase further on dwindling supplies.
3) Fixed income groups will be hit the hardest because their salaries will not be revised to include the cost of living even as prices of items soar.
4) Household as well as national savings drop because there is less money to save now as people use a greater part of their disposable income to pay for daily-use commodities.
5) Retail investors owning stocks of inflation-sensitive companies such as automobiles are likely to see the stock prices fall on low sales as people prefer to not spend money on “luxury” items, sticking instead to the “necessities”.
The better news:
A higher rate of inflation can make repaying loans easier because they can end up paying back less money if the interest rate is lower than the rate of inflation.