Households observing financial discipline will automatically help themselves to combat any financial stress triggered by inflation or deflation
Sajjad Bazaz
A rise in the general price level of goods and services, precisely inflation, has remained a constant subject of concern as it affects everything from the cost of groceries and housing to the economy’s overall health. On one hand, the Reserve Bank of India has remained (and continues to remain) too focused to control the inflation within the given acceptable limits. On the other hand, the consumers are continuously struggling to negotiate the pressure of inflation on their overall financial health.
According to the National Statistics Office (NSO) data, India’s retail inflation rate dropped to 5.09 percent in February 2024, the lowest in four months. The retail inflation rate registered a slight drop of 0.01 percent in one month, standing at 5.10 percent in January 2024. The current retail inflation eases to 4.83 percent in April 2024 and remains in the Reserve Bank of India (RBI) tolerance band, set at 2 to 6 percent.
The data further reveals that the rural areas’ inflation rate, at 5.34 percent, remains 0.56 percent higher than the urban areas (4.78 percent), which stood at 4.34 percent in December. Food inflation in February stood at 8.66 percent, a rise from 8.3 percent the previous month.
Notably, the RBI shoulders the responsibility to tame inflation. It tweaks interest rates. The modus operandi is that by increasing lending rates, the apex bank aims to make loans costlier. Once the loans become costlier, the borrowing is discouraged. This leads to a cut in spending by the consumers. A cut in spending translates into less money in the market and prices stop rising. Ultimately, inflation moderates.
For the general public, inflation has always remained a crucial measuring rod to determine their purchasing power. It is the inflation that pushes the prices of goods and services up and consumers’ wallets are hit as they get less for more. They are forced to change their spending habits. For instance, a common household had budgeted Rs.5000 on grocery items per month. They were comfortable with the budget as out of the budgeted amount to be spent on grocery items, they used to save Rs.1000 per month. To be precise, they used to get desired grocery items at Rs.4000 out of the budgeted amount of Rs.5000 till last month. But this month there was a price rise in certain grocery items in the same list and that led them to shelve out extra bucks by let’s say Rs.500 more. The items they used to get at Rs.4000, were now available at Rs.4500. So, the price rise reduced their savings by Rs.500. If the price rise continues further, they may be forced to spend a full budgeted amount of Rs.5000 earmarked for grocery items and will be left with no savings. In fact, the uncontrolled price rise has remained a permanent feature and there is a possibility of getting the same list of items at the price more than the budgeted amount. In this situation, the household may be either forced to remove an item from their cart or buy the product that has the inflated price by paying extra to affect their domestic budget.
So, factors causing price rise of essential and non-essential goods and services and creating uncertainty in consumption actually leads to inflation. Experts are always of the opinion that inflation should be moderate enough to drive consumption and create a baseline for economic growth. Inflation that is out of range (precisely high inflation) is a termite on the economy and the scenario clearly indicates that all is not well with the economy.
Then there is another serious factor of inflation which equally makes worrying – the low inflation. This kind of inflation, when in the negative zone, is referred to as deflation.
In a situation like this, prices fall over time. It is because either demand falls a lot or there is more production of goods and services than required. This leads to fall in sales and companies are forced to sell their products at discounted rates to lure customers in buying spree. Precisely, contrary to the high inflation scenario, prices fall when there is deflation. The situation aggravates when consumers stop shopping for more and more products despite low prices as they look for further discounts in coming times. This means, the demand continues to fall, leading to further deflation.
Deflation is not at all good for the financial health of businesses as low demand of their products and services affects their profitability. All this leads to a slowdown in the economy. In simpler terms, the deflationary situation is not good for the overall economic health of the country as it leads to economic growth in a depressed mode.
A Wall Street Journal report is worth quoting. It states that deflation has hit countries in Europe and Japan. Even in Asia, seven out of 10 countries excluding Japan are facing deflation. India has now joined this list after reporting a fall in prices for the fifth time in decades. However, experts see no reasons to worry about deflation in India as the demand scenario in India remains intact and is not affected. “The key reason for deflation is the fall in global commodity prices. After years of high inflation, the fall in prices could very well help improve demand for goods and services in India. This will help accelerate economic growth further, not slow it down,” argues an acquaintance who is an economic expert.
Meanwhile, the path of inflation is hugely dependent on the prices of domestic commodities like vegetables, cereals, spices, etc. Earlier, the RBI had blamed effects of the pandemic, the geo-political conflict, and the weakness in the Indian rupee manifesting in the demand-supply mismatch of goods and services, leading to downside risks to growth.
So, how to remain insulated against inflation? The most important thing for common consumers is to remain financially disciplined not just about spending but about their savings and investments too. They should not allow their spending habits to eat up their savings. In fact, they should live on a budget that guides them in the event of inflation as well as during the deflation situation. When it comes to savings and investments, they should choose the right investment products, which not only suits their personal finance needs, but also allows their savings to grow enough to beat inflation as well as deflation.
The bottom line is that managing personal finances is one of the best ways to beat inflation. Once households consistently live a life on a budget tailored according to their source of income and putting their income in line with the resources, it’s guaranteed to result in their wealth creation over time. Not only this, the households with this strategy of financial discipline will automatically help themselves to combat any financial turmoil triggered by inflation or deflation.
(The author is a veteran journalist/columnist)
