Inflation is the general increase in prices of goods and services over time, which reduces the purchasing power of your money. In simple terms, the same ₹100 buys less than before, so your cost of living goes up even if your income has not increased at the same pace.
What is inflation
Inflation is the rate at which the overall price level of goods and services in an economy rises over a period.
When inflation stays moderate and stable, it is often considered a sign of a growing economy, but high or volatile inflation hurts households and businesses.
In simple terms inflation is the rate at which prices rise across an economy, measured by indices like CPI, which covers a basket of household items from food to fuel. A 4% inflation rate implies ₹100 today equals ₹96 in buying power next year, eroding savings if incomes lag.
How Inflation is Measured in India
Inflation in India is measured primarily through two key indices: the Consumer Price Index (CPI) for retail prices faced by households and the Wholesale Price Index (WPI) for producer-level costs.
The CPI tracks price changes in a fixed basket of goods and services like food, fuel, housing, and education, reflecting urban and rural consumer spending patterns. The Reserve Bank of India (RBI) uses the combined CPI as its main inflation target, aiming for 4% with a tolerance band, calculated monthly.
WPI measures average price changes at the wholesale stage for primary articles, fuel, and manufactured goods.
Why does inflation happen?
Inflation occurs when the general prices of goods and services rise steadily, driven by imbalances between supply, demand, and costs in the economy. In India, common triggers include surging food prices from poor monsoons, global oil shocks due to high import reliance, and rapid money supply growth outpacing production.
Demand-Pull Causes
Demand exceeds supply when consumer spending surges—such as during festivals or post-lockdown booms—pushing prices up as too much money chases limited goods like electronics or homes. Government stimulus or rising exports amplify this, especially in a growing economy like India’s where middle-class demand for proteins and urban services outstrips agricultural output.
Cost-Push Factors
Production costs rise from expensive inputs like fertilizers, diesel, or imported edible oils, which farmers and factories pass on to consumers. India imports 80-90% of its crude oil, so global factors like war, government shutdown directly hike transport and food prices.
Supply-Side Issues
Erratic weather reduces crop yields for staples like rice, wheat, and vegetables, while poor storage, hoarding, and inefficient supply chains worsen shortages. Structural bottlenecks, such as low farm productivity or export bans creating panic buying, keep prices volatile despite RBI efforts.
Built-In and Monetary Pressures
Workers demand wage hikes to match living costs, prompting businesses to raise prices in a cycle; meanwhile, excess money printing or low interest rates fuel overall demand without matching supply growth. The RBI counters via rate hikes, but food and fuel shocks often override these.
Impact on daily household budget
Inflation directly increases the cost of living, so monthly expenses go up even if a family does not change its consumption pattern. For example, a household spending ₹5,000 on groceries may soon need around ₹7,000 for the same items when prices rise.
Middle-income households report significant jumps in core expenses like food, fuel, utilities, healthcare, and education, often 30–60% higher over a few years, which forces cutbacks in non-essential spending.
As more income is diverted to essentials, the ability to save for goals like children’s education, home purchase, or retirement gets squeezed, eroding long‑term financial security.
Effects on savings, loans, and investments
Inflation reduces the real value of savings kept in low-yield products such as basic savings accounts or fixed deposits if their returns are lower than the inflation rate. Over time, this means the same corpus will buy fewer goods and services.
Higher inflation often leads to higher interest rates, which make home loans, car loans, and personal loans more expensive, increasing EMIs and pressuring household cash flow.
At the same time, well-chosen growth-oriented investments that beat inflation can help protect and grow purchasing power, which is why financial planners emphasise inflation-adjusted returns for Indian investors.