What is Inflation?
Inflation refers to the rise in prices of goods and services over time, which results in a decline in the purchasing power of money. It's a critical factor when planning long-term investments or savings.
Formula Used
Future Value = Present Value x (1 + Inflation Rate)^Years Real Value After Inflation = Present Value / (1 + Inflation Rate)^Years
Example
- Present Value = Rs. 10,000
- Inflation Rate = 6%
- Duration = 10 years
- Real Value = Rs. 10,000 / (1 + 0.06)^10 = Rs. 5,584 approx
This means that Rs. 10,000 today will have the purchasing power of only Rs. 5,584 after 10 years if the inflation rate is 6% per annum.
Frequently Asked Questions (FAQs)
Why should I consider inflation when saving?
Ignoring inflation can make your future goals underfunded. Inflation helps you estimate the true value needed.
What is a good inflation rate to assume?
In India, a 5-6% inflation rate is commonly assumed for long-term planning.
Does inflation affect fixed deposits?
Yes, the real return on FDs is the nominal interest rate minus the inflation rate.