Inflation has reduced Rs. One Lakh to just Rs. 5741 in 41 years!

Published: June 21, 2022 at 6:00 am

The cost inflation index for the financial year 2022-2023 was recently announced. We compile 41 years of cost inflation index data to understand the devastating consequences of inflation and why our singular focus should be on beating inflation for our long term goals.

The cost inflation index (CII) is not a measure of true price inflation in India – in fact, no such metric released by the govt is. The CII is used to inflate the purchase price of taxed assets under long-term capital gains with indexation.

For example, from FY 2021-22 to FY 2022-23, the CII has only increased by 4.42%. This is obviously much lower than current inflation levels of close to 7%! See: Explained: Why did RBI increase the REPO rate? How will it impact debt mutual funds?

Therfore the CII is an approximate measure of the decrease in value of our networth with the express understanding that the actual decrease in value would be much higher. This is because many services like healthcare and education are unregulated and have much higher inflation. In addition, due to the availability of new products and services, new expenses get added up.

The CII initially had the base year of 1981-1982 with a value of 100. The govt then changed the base year to 2001-02. Both datasets are available here: Cost Inflation Index Historical Data. We shall use the combined dataset (41 years: 1981-82 to 2022-2023) for this study.

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In the 41 years that have elapsed, the CII has increased from 100 to 1410 (this is in the combined scale and will not match the latest CII date). This can be stated in many ways. Some readers tend to prefer this version:

Something that was priced Rs. 100 in 1981 will now cost at least Rs. 1410

This is, of course, the literal meaning of inflation = price increase. I prefer to focus on the effect of inflation on purchasing power. This is well conveyed by the Tamil word for inflation:  பணவீக்கம் (or literally money becoming weaker).

A purchasing power of Rs. 100 in 1981 (which was significant) has been reduced to just Rs. 5.7 today (which is unworthy of even almsgiving).

The two statements are completely identical, but I prefer the latter as it is a bit more dramatic, highlighting the risk of chasing safety in investments. And one can add zeros to the above statement to get “Rs. one lakh has reduced to just Rs. 5741 over 41 years”.

The decrease in value of Rs. 100 from 1980 to 2022 due to inflation
The decrease in value of Rs. 100 from 1980 to 2022 due to inflation

It is important to remind ourselves that the actual inflation we face can be much higher, even for a frugal existence. Here is an example: Inflation in India: Some Real Numbers

This is the growth of the cost inflation index over the last 41 years.

Cost Inflation Index from 1980 to 2022
Cost Inflation Index from 1980 to 2022

These are the annual rates of inflation. Though there is a downward slant in the rates, cost inflation could rapidly increase from time to time.

Yearly change in cost inflation rate from 1980 to 2022
Yearly change in cost inflation rate from 1980 to 2022

Since 2018, the 5Y cost inflation rate has been less than 5%. Have your essential expenses over the last 3-4 years been only at that level? Even in the unlikely event of this being true, it will not last long as this too is cyclic in nature.

CII vs 5Y annualized cost inflation rate from 1980 to 2022
CII vs 5Y annualized cost inflation rate from 1980 to 2022

As discussed in this video, if we do not safeguard our investment by taking adequate risks to try and beat inflation when young, we may not even buy a roadside chai in the future.

How to protect our money?

Yes, we need to invest in equity when young to combat inflation. However, this alone is not enough! Long-term investing in equity will not always be successful. See for example: What return can I expect from a Nifty 50 SIP over the next 10 years?

A higher income, the right investments, and active risk management is the only way to protect against inflation degrading the future value of our networth.

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