What is Inflation?
Inflation is the rate at which the general level of prices for goods and services is rising. As inflation rises, every rupee you own buys a smaller percentage of a good or service. Essentially, inflation erodes the purchasing power of your money.
How to calculate Future Cost due to inflation?
To find out how much an item will cost in the future, we use the future value compound interest formula:
Future Cost = Present Cost × (1 + Inflation Rate)^YearsFor example, if a car costs ₹10 Lakhs today and inflation is 6%, in 10 years, that exact same car (or equivalent model) will cost approximately ₹17.9 Lakhs. This is why you need to invest your money in instruments that beat inflation!
How to calculate the loss of Purchasing Power?
If you have ₹10 Lakhs in cash under your mattress, it doesn't grow. But because prices are rising, that ₹10 Lakhs can buy fewer things in the future. To calculate what your current money will be worth in tomorrow's economy (its future purchasing power), the formula is reversed:
Purchasing Power = Present Value / (1 + Inflation Rate)^YearsUsing the same example, if inflation is 6%, your ₹10 Lakhs today will only have the purchasing power of about ₹5.58 Lakhs in 10 years.