Inflation Calculator India

What is Inflation and Why Does it Matter?

Inflation refers to the general rise in prices of goods and services, causing money’s purchasing power to fall. Governments and central banks (like the RBI in India) typically manage inflation to maintain a stable economy, often aiming for a rate of around 2-3% annually. Our online inflation calculator helps you quantify this impact directly.

Understanding what is inflation is crucial for everyone, especially for long-term financial planning and managing your savings and investments effectively.

Common Types of Inflation and Deflation

• Hyperinflation: Extreme inflation that rapidly devalues currency, as seen in historical cases like post-WWI Germany.
• Deflation: A decrease in prices that can lead to reduced consumer spending and economic stagnation.
• Disinflation: A slowdown in the rate of inflation.

Our tool, while an inflation calculator, primarily focuses on the general impact of rising prices on your money.

Key Causes of Inflation in Economics

• Cost-Push Inflation: When production costs rise (e.g., oil prices, raw materials), leading to higher goods prices.
• Demand-Pull Inflation: Occurs when aggregate demand for goods and services in an economy outpaces aggregate supply, driving up prices.
• Built-in Inflation: Persistent inflation due to expectations and past economic events, often tied to a wage-price spiral.

Knowing the causes helps in understanding broader economic trends and potentially influencing future inflation rate calculations.

Monetarist Perspective on Inflation

Monetarists, led by economist Milton Friedman, believe that inflation is mainly driven by changes in the money supply. Their model, known as the Quantity Theory of Money, states that the amount of money in circulation directly impacts a currency's value. Public institutions like the Reserve Bank of India (RBI) play a major role in stabilizing their respective currencies through monetary policy.

MV = PY

Where:
M = money supply
V = velocity of money, defined as how many times a unit of currency is involved in transfers per year
P = price level
Y = economic output of goods and services

In the Equation of Exchange, total spending (MV) is equal to total sales revenue (PY). V and Y are generally considered constant by economists; the number of transactions a currency goes through a year and the total economic output are certainly less volatile than the money supply or price level. By assuming V and Y to be relatively constant, what's left are M and P, which leads to the Quantity Theory of Money, which states that the money supply is directly proportional to the value of the currency. This is a foundational concept for any inflation calculator online.

How is Inflation Calculated Globally and in India?

In the U.S., the Department of Labor is responsible for calculating inflation from year to year, typically using the Consumer Price Index (CPI). CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Similarly, in India, the Ministry of Statistics and Programme Implementation releases CPI data used to track inflation.

As an example, to find the inflation from January 2016 to January 2017, first, look up the CPI for both months. Historical CPI data can be found on The Bureau of Labor Statistics website for the U.S., and for India, on the National Statistical Office (NSO) website:

• Jan. 2016 (CPI U.S.): 236.916
• Jan. 2017 (CPI U.S.): 242.839

Calculate the difference:

242.839 - 236.916 = 5.923

Calculate the ratio of this difference to the former CPI:

5.923 ÷ 236.916 = 2.5%

The inflation from January 2016 to January 2017 was 2.5%. When the CPI for the former period is greater than the latter, the result is deflation rather than inflation. Our inflation calculator simplifies these complex calculations for you.

Challenges with Measuring Inflation Accurately

While the example given above to calculate CPI might portray inflation as a simple process, in the real world, measuring the true inflation of currencies can prove to be quite difficult.

Take, for instance, the basket of goods and services used to determine inflation from period to period. It is hard to distinguish whether the prices for these goods and services fluctuate based on changes in quality or inflation. For example, did the price of a computer really inflate that much, or was it due to new breakthrough technology that made them cost more?

Dramatic rises or falls in the prices of certain things can destabilize the situation. For instance, hikes in oil prices will lead to higher inflation, but this is temporary and may create false impressions of higher inflation.

People who are part of different demographics can be affected differently by inflation rates. As an example, high oil prices create higher inflation for truck drivers but affect stay-at-home mothers to a lesser degree. These nuances highlight why using a precise inflation calculator is helpful for personal financial analysis.

How to Beat Inflation: Strategies for Your Investments and Savings

Inflation is most impactful to people who hold large amounts of liquid cash sitting idle. Using the inflation rate of 2.5%, a checking account (that doesn't earn interest) with ₹50,000 will result in a loss in the real value of ₹1,250 by the period's end. It can be seen that when it comes to protecting money from inflation, whether moderate or severe, it is generally best to do something other than storing it somewhere that doesn't earn interest.

It is common for people to purchase real estate property, stock, funds, commodities, TIPS, art, antiques, and other assets to hedge against inflation. All these investment options have pros and cons. Investors usually own more than one type of these assets to manage risk. Commodities and TIPS are discussed more often because they are closely related to inflation. However, they are not necessarily the best investment hedge against inflation. Our inflation adjusted calculator can help visualize these concepts.

Commodities as an Inflation Hedge

Investing in commodities, which include gold, silver, oil, copper, and many raw materials or agricultural products, is one of the popular ways through which a person can protect themselves from inflation because commodities are items that have intrinsic value. In addition, during times of high inflation, as money loses its value, demand for commodities can increase their value. For many centuries, gold was traditionally viewed as an effective resource with which a person could hedge against inflation because it is a finite resource with value that can be stored easily. While other precious metals can be used to hedge against inflation, gold is the most popular.

TIPS (Treasury Inflation-Protected Securities) and Similar Bonds

In the U.S., there are financial instruments called TIPS, or Treasury Inflation-Protected Securities. These are bonds issued by the U.S. Treasury that specifically provide protection against inflation. Because the principal of a TIPS is proportional to inflation, as measured by indices such as the CPI, TIPS acts as a relatively effective hedge against periods of high inflation. They usually only make up very small portions of people's portfolios, but anyone seeking extra protection can choose to allocate more room in their portfolio toward TIPS. Because they are largely unrelated to stocks, which are usually the bulk of portfolios, they are also great for diversification purposes. Other countries also offer similar inflation-indexed bonds, such as the United Kingdom's index-linked gilt, Mexican Udibonos, or German Bund index.