Rs. 100 in 1981 is now worth just Rs. 5 thanks to inflation!

Published: April 15, 2023 at 6:00 am

The cost inflation index for the financial year 2023-2024 was recently announced. The index increased from 331 in the previous financial year to 348 – an increase of 5.14%. We compile 42 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.

Therfore, the CII is an approximate measure of the decrease in the 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 a 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. This study will use the combined dataset (42 years: 1981-82 to 2023-2024).

In the 42 years that have elapsed, the CII has increased from 100 to 1483 (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:

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    Something that was priced Rs. 100 in 1981 will now cost at least Rs. 1483

    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. 5.4 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 statement to get “Rs. one lakh has reduced to just Rs. 5447 over 42 years”.

    Some people argue, “But during this time, our salaries have increased at a higher rate!”. Well, it better increase! Else we would be in trouble. But that is missing the point.

    The point is that this decrease in spending power will continue after our salary goes to zero at retirement. So we need a plan to (1) invest right so that we can keep spending as we do after retirement and (2) create income sources (active and passive) to supplement our income (before and after retirement). See: How to build the ideal retirement portfolio.

    This graph is a grim reminder of the task ahead of us.

    The decrease in value of Rs. 100 from 1980 to 2023 due to inflation
    The decrease in value of Rs. 100 from 1980 to 2023 due to inflation

    It is important to remind ourselves that our actual inflation 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 42 years.

    Cost Inflation Index from 1980 to 2023
    Cost Inflation Index from 1980 to 2023

    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 the cost inflation rate from 1980 to 2023
    Yearly change in the cost inflation rate from 1980 to 2023

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

    CII vs 5Y annualized cost inflation rate from 1980 to 2023
    CII vs 5Y annualized cost inflation rate from 1980 to 2023

    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 ten 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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