Tips to tackle Inflation

Inflation as we have discussed, is bad. It affects your buying power as well as it hurts your investments. This is because, the interest on your investments is now worth less than what you were expected to get. The hardest hit are the retired people, who are risk averse and have most of their investments in fixed income instruments.

Inflation adjusted rate: ((1+i)/(1+r))-1 x 100

Here, i is the interest rate and r is the inflation. Thus, an interest rate of 10% would reduce to 3.77% if inflation is 6%.

Here are a few tips to leash the monster called inflation:

1. 
   
   Choose investments with returns greater than the rate of inflation.
   
   
   
2. 
   
   Select investments with tax deferral of contributions and earnings.
   
   
   
3. 
   
   With many retirements now lasting 15 to 30 years, retirees should choose investments that will hedge against inflation. The best ones would be capital indexed bonds, whose returns are linked to inflation.
   
   
   
4. 
   
   Look for instruments with highest interest rate and shortest maturity.
   
   
   
5. 
   
   Review the limits of your insurance coverage’s periodically, especially homeowners, renters, and umbrella coverage.
   
   
   
6. 
   
   Don’t buy into the argument that it is better to borrow and spend money now, paying the debt later with “cheaper” money.
   
   
   

Fixed Income Laddering - This is an inflation tackling strategy where one invests in fixed income securities over fixed periods. Equal amounts must be put in fixed time intervals (for example 2, 3, 5 year FDs). It gives you:

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  a steady income stream
  
  
  
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  money that is not locked for long durations (gives you the ability to invest in better returns options)
  
  
  
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  freedom to adjust your investments as per the financial and market situation.
  
  
  

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How does India calculate Inflation?

Continuing from the last post, I'll try to discuss how India calculates Inflation and how is that different from the rest of the world. But first let's discuss what is Wholesale Price Index (WPI) and Consumer Price Index (CPI).

Wholesale Price Index - WPI was first published in 1902, and was one of the more economic indicators available to policy makers until it was replaced by most developed countries with the Consumer Price Index in the 1970s.

WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag only two weeks. The Indian government has taken WPI as an indicator of the rate of inflation in the economy.

Cosumer Price Index - CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.


CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.

India is the only major country that uses a wholesale index to measure inflation. Most countries use the CPI as a measure of inflation, as this actually measures the increase in price that a consumer will ultimately have to pay for. WPI does not properly measure the exact price rise an end-consumer will experience because, as the name suggests, it is at the wholesale level.

WPI is basically helpful to measure the inflation at business level but we are using this to measure the inflation at consumer level. Moreover, it doesn't take into account most of the services relevant to today's consumer since it was last updated in 1993-94.

What should we do to counter inflation? Wait till the next post...

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The monster of Inflation

Inflation has been a big cause of concern world over in the recent past, especially in India. So, I thought to present a crash course on this topic today. My source is obviously the ever-expanding Internet.

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.[source]

Inflation is a world problem. Here is a view of inflation all over the world.

 So, what causes Inflation? Why do prices rise? Many people mistakenly believe that prices rise because businesses are "greedy". This is not the case in a free enterprise system. Because of competition the businesses that succeed are those that provide the highest quality goods for the lowest price. So a business can't just arbitrarily raise its prices anytime it wants to. If it does, before long all of its customers will be buying from someone else.

It is actually the supply on money in the market that increases the prices!!! Yes! Prices of comodities rise because people have more money to spend and hence are willing to pay more for the same thing. In other words, with more money supply or monetary inflation (govt printing/minting more Rupees), everyone has more money in their pockets and that results in buying more. Basically when the government increases the money supply faster than the quantity of goods increases we have inflation. Interestingly as the supply of goods increase the money supply has to increase or else prices actually go down. The basic Demand and Supply theory we read in class 12!!

How does India calculate Inflation? Well, that is for the next post!!! Keep checking this space...

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What happened in Dubai?

We suddenly found our markets go deep in red this Friday (11/27/2009). There was some buzz about something happening in Dubai that sent the entire world financial markets on a downward spiral. Every minister in Indian government was talking about this. RBI asks all the banks to declare their exposure in Dubai. So what was it that could transpire in something so big? Let's try and ind out.

Dubai has been one of the many economies that lived and thrived on debt. So, when the financial markets around the world were in a boom, Dubai racked up a debt of $ 59 Billion to build lavish townships, to attract people with a great lifestyle.

Now that the boom has gone bust, Dubai is stuck with a glut of real estate that no one wants to buy or rent. Creditors and markets had always assumed that in any such situtation, Abu Dhabi would bail out Dubai. But that assumption was called into question this week, and the resulting fear that Dubai might not be able to pay its bills sent a wave of uncertainty rippling through markets just as investors thought the worst of the global financial instability was over.

News Clippings:

- NYTimes

- Indian Express

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Recession Over???

The last one and a half year has been like hell for every one. The economy of the entire world slowed down drastically forcing organizations to cut jobs and sending the economy in a downward spiral.


Some of the most common questions these days are: Is recession coming to and end? Is economy showing an improvement? Has the employment rate recovered? Recession is generally described as "a period of economic decline". Lets find out some signs which show that recession is coming to an end.

• A survey of 44 professional forecasters released by the National Association for Business Economics USA, also known as the NABE, found that 80 percent of the respondents believed the economy was growing again after four straight quarters of declines. 
• The latest government data on Monday showed the economy growing by 6.1% year-on-year during the first quarter (April-June) of the fiscal the fastest for any quarter since the global financial crisis began almost a year ago making officials expect 6.5% growth this year making India the second-fastest growing major economy after China, which notched almost an 8% growth rate. More importantly, it's an improvement over the 5.8% notched up by India in the previous quarter and 5.3% recorded in the quarter before that. see this video: 

• FIIs are coming back!

Let's hope these signs result in an end to the recession.

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