Saturday, April 15, 2023
HomeMutual FundRs. 100 in 1981 is now worth just Rs. 5 thanks to...

Rs. 100 in 1981 is now worth just Rs. 5 thanks to inflation!


The cost inflation index for the financial year 2023-2024 was recently announced. The index increased from 331 in the previous financial year to 348 – an increase of 5.14%. We compile 42 years of cost inflation index data to understand the devastating consequences of inflation and why our singular focus should be on beating inflation for our long term goals.

The cost inflation index (CII) is not a measure of true price inflation in India – in fact, no such metric released by the govt is. The CII is used to inflate the purchase price of taxed assets under long-term capital gains with indexation.

Therfore, the CII is an approximate measure of the decrease in the value of our networth with the express understanding that the actual decrease in value would be much higher. This is because many services like healthcare and education are unregulated and have much higher inflation. In addition, due to the availability of new products and services, new expenses get added up.

The CII initially had a base year of 1981-1982 with a value of 100. The govt then changed the base year to 2001-02. Both datasets are available here: Cost Inflation Index Historical Data. This study will use the combined dataset (42 years: 1981-82 to 2023-2024).

In the 42 years that have elapsed, the CII has increased from 100 to 1483 (this is in the combined scale and will not match the latest CII date). This can be stated in many ways. Some readers tend to prefer this version:

Something that was priced Rs. 100 in 1981 will now cost at least Rs. 1483

This is, of course, the literal meaning of inflation = price increase. I prefer to focus on the effect of inflation on purchasing power. This is well conveyed by the Tamil word for inflation:  பணவீக்கம் (or literally money becoming weaker).

A purchasing power of Rs. 100 in 1981 (which was significant) has been reduced to just Rs. 5.4 today (which is unworthy of even almsgiving).

The two statements are completely identical, but I prefer the latter as it is a bit more dramatic, highlighting the risk of chasing safety in investments. And one can add zeros to the statement to get “Rs. one lakh has reduced to just Rs. 5447 over 42 years”.

Some people argue, “But during this time, our salaries have increased at a higher rate!”. Well, it better increase! Else we would be in trouble. But that is missing the point.

The point is that this decrease in spending power will continue after our salary goes to zero at retirement. So we need a plan to (1) invest right so that we can keep spending as we do after retirement and (2) create income sources (active and passive) to supplement our income (before and after retirement). See: How to build the ideal retirement portfolio.

This graph is a grim reminder of the task ahead of us.

The decrease in value of Rs. 100 from 1980 to 2023 due to inflation

It is important to remind ourselves that our actual inflation can be much higher, even for a frugal existence. Here is an example: Inflation in India: Some Real Numbers

This is the growth of the cost inflation index over the last 42 years.

Cost Inflation Index from 1980 to 2023
Cost Inflation Index from 1980 to 2023

These are the annual rates of inflation. Though there is a downward slant in the rates, cost inflation could rapidly increase from time to time.

Yearly change in the cost inflation rate from 1980 to 2023
Yearly change in the cost inflation rate from 1980 to 2023

Since 2018, the 5Y cost inflation rate has been less than 5%. Have your essential expenses been only at that level over the last 3-4 years? Even in the unlikely event of this being true, it will not last long as this, too, is cyclic.

CII vs 5Y annualized cost inflation rate from 1980 to 2023
CII vs 5Y annualized cost inflation rate from 1980 to 2023

As discussed in this video, if we do not safeguard our investment by taking adequate risks to try and beat inflation when young, we may not even buy a roadside chai in the future.

How to protect our money?

Yes, we need to invest in equity when young to combat inflation. However, this alone is not enough! Long-term investing in equity will not always be successful. See, for example: What return can I expect from a Nifty 50 SIP over the next ten years?

A higher income, the right investments, and active risk management is the only way to protect against inflation, degrading the future value of our networth.

Do share this article with your friends using the buttons below.


🔥Enjoy massive discounts on our courses and robo-advisory tool! 🔥


Use our Robo-advisory Excel Tool for a start-to-finish financial plan! More than 1000 investors and advisors use this!


New Tool! => Track your mutual funds and stocks investments with this Google Sheet!


  • Follow us on Google News.
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Join our YouTube Community and explore more than 1000 videos!
  • Have a question? Subscribe to our newsletter with this form.
  • Hit ‘reply’ to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Get free money management solutions delivered to your mailbox! Subscribe to get posts via email!


Explore the site! Search among our 2000+ articles for information and insight!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.


Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.


Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   


Our new book for kids: “Chinchu gets a superpower!” is now available!

Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.

Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!

Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!

Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. – Arun.

Buy the book: Chinchu gets a superpower for your child!


How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!


Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!


We publish monthly mutual fund screeners and momentum, low volatility stock screeners.


About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)


Connect with us on social media


Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.


Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.


Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)


 



RELATED ARTICLES

LEAVE A REPLY

Please enter your comment!
Please enter your name here

- Advertisment -
Google search engine

Most Popular

Recent Comments