• HDFC
• 29 Apr 2017
• Equity Product

HDFC, Tester

Wholesale and consumer inflation have been in the news recently given that both of them have been declining. While wholesale inflation is derived from the values of the Wholesale Price Index the consumer inflation is derived from the Consumer Price Index.

WPI vs CPI: What should you track?

Wholesale Price Index (WPI) measures and tracks changes in prices of a representative basket of wholesale goods. In simple words, prices of certain goods were used in the base year to calculate WPI. India uses WPI as the main inflation indicator.

Consumer Price Index (CPI), on the other hand, measures and tracks changes in average prices of a basket of goods and services commonly used by consumers. Some of the items include food, fuel, transportation, medical care etc.

In India we still follow WPI (wholesale price index) instead of CPI (consumer price index)

Between the two, the CPI acts more as a barometer of your cost of living. Hence a fall in CPI has a higher impact on your costs than WPI.

While studying the impact of inflation, you should look at primary articles and fuel items as they have a direct impact on your disposable income.

Medical inflation

Medical or health inflation is another indicator you should factor in while building your retirement kitty, which has a direct impact on your healthcare. As per industry estimates, medical inflation has risen in the range of 12-15% in the past two years. 
The underlying assumption is that your expenses towards your healthcare needs will be higher as you age. Hence there is a need to build a healthcare kitty, which is sufficient enough to beat this rising inflation

Lifestyle Inflation

Last but not the least is Lifestyle Inflation. As your disposable income increases, you may develop some tastes and desire, which come at a cost. Eating at fine dine restaurants, playing golf, a foreign holiday, watching movies at multiplexes are some examples. This is what you spend on maintaining a lifestyle that you desire; hence it is termed lifestyle inflation. Lifestyle inflation is not a published figure and it varies from individual to individual. Hence you have to take stock of lifestyle expenses, which you will incur in future and make appropriate savings today.

Inflation and Your Money

Inflation gives you an indication of the actual value of your money. Apart from giving an idea about your future value of expenses, inflation has a far-reaching impact on your money.

A rising inflation can act like a double-edged sword. Today it can eat into your savings and tomorrow it can make your savings insufficient for your basic needs.

To avoid this, you should build an investment basket with investments in equity, gold and real estate, which provide a natural hedge against inflation. And you have to factor add at least 8% annual inflation figure to those expenses for its future value while calculating your retirement corpus.

This will truly ensure you have a financially independent life after 60.