What is Inflation? Causes, Effects & How It Affects Your Money

Inflation is the slow increase in the cost of basic needs such as food, fuel, and clothing. As a result, you purchase less with the same ₹100. It increases everyone's cost of living.

Example: 

Dev receives a monthly salary of ₹20,000. In 2015, he paid ₹3,000 on his groceries, but this year it is ₹3,600 due to the same groceries. He has to pay less money on other needs because there was no raise in his salary.

Here’s a simple table showing how inflation affects prices:

This article uses Dev's struggle to help you understand inflation. Life becomes more difficult when prices rise faster than incomes. Everyone is concerned about inflation because of this!c

Understanding Inflation with Simple Examples

Prices slowly rise due to inflation, increasing the cost of everything from groceries to bus tickets. Let's examine how to compute inflation rates and gain an understanding of this via Dev's story.

Dev's Inflation Struggle:

Dev earns ₹25,000 monthly. Two years ago, his monthly groceries cost ₹4,000. Today, the identical items cost ₹5,000 - that's 25% more! Since his salary didn't increase, he must cut other expenses.

Understanding Inflation with Simple Examples

Prices slowly rise due to inflation, increasing the cost of everything from groceries to bus tickets. Let's examine how to compute inflation rates and gain an understanding of this via Dev's story.

Dev's Inflation Struggle:

Dev earns ₹25,000 monthly. Two years ago, his monthly groceries cost ₹4,000. Today, the identical items cost ₹5,000 - that's 25% more! Since his salary didn't increase, he must cut other expenses.

Price Changes and Inflation Rates:

Here's how everyday items became costlier and how to calculate the inflation rate:

Inflation Rate Formula:

(New Price - Old Price) ÷ Old Price × 100

Example for milk: (₹60-₹50)/₹50 × 100 = 20% inflation

Why Inflation Matters?

• Purchasing Power: ₹100 buys less than before
• Savings Erosion: Money saved loses value over time
• Budget Pressure: When salaries don't match price hikes, families struggle

Real-Life Impact:
 

For Dev, a 25% grocery inflation means:
 

• Either spending ₹1,000 more monthly
• Or buying 20% fewer items with his ₹4,000 budget

Key Takeaways:
 

1. Inflation is measured as a percentage price increase
2. Even small % hikes hurt when incomes don't rise
3. Essential items (food, transport) often inflate faster

If prices rise but your income remains constant, you're effectively losing purchasing power each year. This is why inflation concerns everyone, including traders like Dev.

Why Prices Rise: Understanding Inflation Causes

Imagine your ₹100 note is slowly buying less bread, milk, and vegetables. This occurs due to different types of inflation. Let's understand why, using Dev's bakery as our example.

Meet Dev's Baking Challenges

Last year, Dev saw his bread prices rise because:
 

• Wheat became 20% costlier (now ₹40/kg instead of ₹33/kg)
• 30% more customers wanted his special bread
• New ₹500 notes flooded the market, making money less valuable

Here's how different inflation rates work:

This table illustrates the impact of different types of inflation on prices.

Other Price Pushers:
 

• Worker Wages: Bakery staff demanded a 15% raise in bread cost by ₹1
• Global Issues: The Ukraine war made sunflower oil 40% costlier
• Fuel Prices: Diesel at ₹90 to ₹100/litre, increased delivery charges

Real Consequences: (When these combine)
 

• Dev's bread went from ₹10 to ₹15 in 2 years
• Regular customers like Ramesh (a daily wage worker) can only afford half the bread now.

Key Insight

Inflation isn't just "prices rising":
 

1. Demand (people wanting more)
2. Supply (things becoming scarce/costly)
3. Money (too many notes chasing a few goods)

Schoolteacher Meena, one of Dev's long-time customers, began baking at home after he raised the price of bread by ₹5. This demonstrates how inflation impacts purchasing patterns!

How Inflation Affects Your Money?

Every year, inflation reduces the value of your money. Last year's ₹100 purchase now costs ₹110. This makes life more costly for everyone since you need more money for the same things. 

Example: Dev saved ₹50,000 in his bank account last year. Due to 8% inflation:
 

• His ₹50,000 now buys only goods worth ₹46,000 in last year's value
• His monthly expenses rose from ₹10,000 to ₹10,800 for the same items

This table shows you how Inflation Impacts Your Money:

Key Effects:
 

• Savings buy less than before.
• The same salary feels smaller.
• Need more money for the same lifestyle.
• Fixed incomes (pensions) hurt most.

Unless incomes increase in proportion to inflation, it lowers in quality for the whole world.

Conclusion 

Inflation gradually takes its toll on the life of people such as Dev, who has to work hard, but his money does not buy as much every year. Two years ago, Dev used to receive a salary of ₹15,000, which was enough to meet his needs comfortably. Today, as the price of things continues to rise and his salary remains the same, he can barely afford essential needs such as food and rent. 

His savings have been worthless, and his objectives are disappearing like a chance of getting a home. Those who are unable to raise their income are often those hit hardest by inflation. Some price increases are not abnormal, but uncontrolled inflation will always be painful to everyone, including workers and businesses. 

FAQs

Why are the prices of everything going up?

Because money is losing value, what ₹100 bought last year now costs ₹110. More money chasing fewer goods causes this.

Will my salary increase as prices rise?

Not always. Many companies fail to raise salaries enough to keep pace with inflation, making life more difficult for fixed-income earners.

How does inflation affect my savings?

₹10,000 saved today will buy less in 5 years. Like milk going from ₹50 to ₹70, your money slowly buys less.

Who benefits from inflation?

People with loans (they repay with "cheaper" money) and businesses that can raise prices faster than their costs.

Can the government stop inflation?

Partially by controlling money printing, supporting farmers to reduce food prices, and adjusting interest rates.

Why do fuel prices affect all products?

Trucks/transport use fuel - so when petrol rises, milk/bread delivery costs increase, making everything costlier.

Is some inflation good?

Yes, 2-4% is a normal range. However, when prices jump 10%, as they did in 2022 (cooking oil went from ₹150 to ₹200), it hurts budgets.

Is all inflation bad?

A moderate level of inflation (2-3%) is standard in growing economies. But high inflation (above 5-6%) hurts everyone's purchasing power.

Can inflation be stopped?

Governments can control it by adjusting interest rates, taxes and money supply. However, stopping it completely is neither possible nor reasonable.

How can I protect myself from inflation?

Invest in assets that grow with inflation, such as property, gold, or stocks. Avoid keeping too much cash in savings.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?