Podcast 29th January 2016
The official inflation numbers tell you that rate of inflation is coming down. Inflation coming down does not mean prices are coming down, it means that prices are rising slower than the rate at which it was rising earlier. CPI (Consumer Price Index) inflation has come off from levels of over 10% to levels of below 6% over the last three years as per official government statistics.
Is the inflation that you face in your day to day life at levels of below 6%? Unfortunately no. Inflation is much higher in reality. Children education costs are rising rapidly with rise of 25% and above per year for most of the private schools. Cost of domestic services is rising much faster than average inflation rate. Electricity bills are shooting up as cash strapped state electricity boards, which are deep in debt due to state subsidies, are forced to raise prices to service the debt.
Fuel costs have not fallen despite sharp fall in global oil prices that are trading at levels seen in 2003. The reason is that government is taking off subsidies on fuel and also raising taxes to make up for loss of revenue on lower fuel prices.
Cost of borrowing has not fallen despite falling official inflation levels and that is largely due to the debt defaults of large corporate borrowers. Home prices are still unaffordable despite a slowdown in real estate sector. Rent costs are rising 10% every year despite many residential and commercial units lying vacant.
Food prices are rising, sometimes by 100%. Water costs are rising on dwindling water resources. Entertainment costs are rising as commercial establishments pass on rising infrastructure costs and rising taxes to you the consumer.
Cost of imported goods is higher on INR depreciation of over 40% over the last few years. Sending your child abroad to study is that much more expensive. Holidays abroad are more expensive as are domestic holidays due to rising infrastructure costs and rising taxes.
Given rising living costs, wages for labour are rising leading to higher cost of maintenance of infrastructure.
Domestic air travel is the only service that is cheaper as airlines facing tough competition outdo each other on prices and also pass on fuel economy benefits to the consumer given sharp drop in ATF (Aviation Turbine Fuel) prices, which are down on the back of drop in global oil prices. Costs of renewable energy including solar and wind are coming down on cheaper input costs. However these costs are not significant to a household.
The real inflation you face has implications for your savings. RBI has lowered interest rates based on official inflation and that has lowered the interest rates on bank fixed deposits and lowered the yields on government bonds and corporate bonds. Your savings in bank fixed deposits and mutual fund schemes that invest in government bonds and corporate bonds will see lower returns even as you face rising inflation leading to a negative real return on your savings.
Learn to invest in the disruptive market. Subscribe to Investors are Idiots.com. Please call Neelima at +919819770641 or log in to investorsareidiots.com to register. Thank you for listening in.