If you do your own grocery shopping, you will notice that the prices of food items keep going up. Retail inflation as measured by Consumer Price Index (CPI) rose an annual 10.09% in October. The main reason for this was the sharp increase in vegetable prices which shot up 45.67% year-on-year. It is this sharp increase in food prices which pinches aam admi the most. It is this increase which leads to the erosion of savings of a retired person, since it is a necessary expense and can't be postponed. The increase in the retail inflation is quite a disturbing trend. What is even more disturbing is that the expectations of prices coming down because of good monsoon seem to have faded away. But more bad news seems to follow. The RBI has said that the retail inflation is likely to remain around or even above 9% in the months ahead. The government on its part has given up the fight. It seems they are waiting to pass this burden to the next government after the general elections.
So how can a common man insulate himself from double digit inflation? Well, there are no quick fix solutions to this. There are hardly any short term financial instruments available to hedge the risk of inflation. Even gold, despite its inflation hedging properties, cannot be relied upon to offer commensurate returns in very short term. More importantly it may not be wise to have a disproportionately high exposure to gold.
The RBI is planning to introduce bonds linked to consumer price inflation for retail investors. The rate of interest on these securities would comprise a fixed rate plus inflation. Interest would be compounded half-yearly and paid cumulatively at redemption. But there is no guarantee whether these bonds will succeed? The RBI had earlier this year launched 10-year inflation-indexed bonds, which were linked toWholesale Price Index (WPI). But it had failed to attract much interest from investors.
High inflation spells bad news since it means the RBI will hesitate to cut interest rates, a step needed to boost economic growth. Consumers will have to keep paying large chunks of their income every month towards repaying housing loans, even as the cost of food and petrol rises and the prospect of decent salary hikes recede because the economy is struggling. Inflation is also really bad for your retirement planning because your target has to keep getting higher and higher to pay for the same quality of life. In other words, your savings will buy less.
Thus unless the government undertakes bold reforms and solves supply side issues, India might be stuck with high inflation for a significant amount of time. Meanwhile investors may have no tangible solution to park their short term funds in safe, inflation hedging instruments.
Has double digit food inflation burned a hole in your pocket? Let me know your comments
So how can a common man insulate himself from double digit inflation? Well, there are no quick fix solutions to this. There are hardly any short term financial instruments available to hedge the risk of inflation. Even gold, despite its inflation hedging properties, cannot be relied upon to offer commensurate returns in very short term. More importantly it may not be wise to have a disproportionately high exposure to gold.
The RBI is planning to introduce bonds linked to consumer price inflation for retail investors. The rate of interest on these securities would comprise a fixed rate plus inflation. Interest would be compounded half-yearly and paid cumulatively at redemption. But there is no guarantee whether these bonds will succeed? The RBI had earlier this year launched 10-year inflation-indexed bonds, which were linked toWholesale Price Index (WPI). But it had failed to attract much interest from investors.
High inflation spells bad news since it means the RBI will hesitate to cut interest rates, a step needed to boost economic growth. Consumers will have to keep paying large chunks of their income every month towards repaying housing loans, even as the cost of food and petrol rises and the prospect of decent salary hikes recede because the economy is struggling. Inflation is also really bad for your retirement planning because your target has to keep getting higher and higher to pay for the same quality of life. In other words, your savings will buy less.
Thus unless the government undertakes bold reforms and solves supply side issues, India might be stuck with high inflation for a significant amount of time. Meanwhile investors may have no tangible solution to park their short term funds in safe, inflation hedging instruments.
Has double digit food inflation burned a hole in your pocket? Let me know your comments
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