Inflation is defined as a general increase in the general price levels of goods and services within the economy. In other words, it is an increase in the cost of living. Inflation remains the most neglected concept by the common man when building a retirement plan. Taking into account the effects of inflation on his financial portfolio is extremely important, as unforeseen inflation can erode the purchasing power of his personal wealth.

In India, inflation is calculated as an annualized change in the Wholesale Price Index (WPI) that includes a set of around 435 goods, as opposed to the Consumer Price Index (CPI) used by the rest of the world. Inflation figures based on WPI are considered to be understated as consumers pay higher prices than wholesale prices.

Inflation results when too much money ends up buying too few goods. This happens when the supply of money flowing in the economy increases or there is some supply constraint. The most common reason for inflation during modern times has been the increase in the money supply. In order to stimulate GDP growth in times of economic slowdown, the Indian government maintained loose monetary policies. Interest rates remained low, increasing disposable income in the hands of citizens. Furthermore, rising crude oil prices also fueled inflationary pressure.

At the same time, growing deficits and excess manufacturing capacity and the threat of housing bubbles cannot undo hyperinflationary trends in the future. Another crucial factor that continues to be ignored by Indian policy makers is ‘food inflation’. The rapid increase in population, coupled with the slowdown in the production capacity of arable land in the country, could lead to hyperinflationary trends. Low yields due to water scarcity and lack of adequate irrigation infrastructure have forced many farmers to give up farming and switch to other occupations. Without a credible, long-term strategy to boost land productivity, long-term inflation cannot be avoided.