HS504 - Personal Finance and Portfolio Management
Satvasheel Powar
Personal Finances Time Value
In ation Goal Setting
of Money
encompasses
Budgeting Insurance Banking Debts Instruments Taxes
Commodity Fixed Income Mutual Funds Stock Market Real Estate
Investing Retirement Planning
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Learning Outcome 3
• What is in ation?
• Types of In ation
• Methods of measuring in ation
• In ation in India
• Effects of in ation on personal nance
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What is inflation?
• In ation is the increase in the overall level of prices for goods and services in an economy over time.
• It is commonly expressed as an annual percentage increase in the Consumer Price Index (CPI) or the
Wholesale Price Index (WPI).
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Implication of in ation 6
Loss of currency value Rising Costs
• In ation reduces the purchasing power of money, meaning that the same amount of money can buy
fewer goods and services.
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In ation 7
• In ation is a sustained rise in the general price levels
of goods and services in an economy over a given
period.
• It also re ects the loss of purchasing power per unit of
money, which means that the same amount of money
will buy less goods and services.
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In ation in India 8
A product (or service)
costing Rs. 60-80 in 1980
was priced close to Rs. 1000
in 2021
Source: https://www.macrotrends.net/countries/IND/india/in ation-rate-cpi
Rs.1000 in 1980 is only worth Rs. 63 in 2021!
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Causes of In ation 9
• Increased Demand: Rising aggregate demand for goods and services can cause
in ation. Consumer spending, government spending, and expansionary monetary
policy can cause this.
• Supply shocks: Natural disasters, wars, and supply chain disruptions can reduce
goods and services supply. Price increases due to supply shortages can cause
in ation.
• Changes in tax rates, regulations, or monetary policy can also affect in ation. The
government increasing the money supply can cause in ation because more money
chases the same goods and services.
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Factors in uencing In ation 10
• Cost of Material
• Cost of Labour
• Productivity
• Taxes (falling or rising)
• Exchange rates
• Domestic economy
• Neighbouring economy
• Interest rates
• Govt Bonds
• Printing of Money
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In ation Percentage 11
Walking In ation Hyper In ation
Creeping In ation Galloping In ation
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Types of In ation 12
• Demand-Pull In ation: • Cost-push in ation
- A result of supply shortages, which - The cost of wages and raw
economists refer to as "too much cash materials rises, causing overall
chasing too few goods." prices to rise.
- An increase in aggregate demand - Production price increases are
- Increased employment, higher wages, passed on to consumers, resulting
more demand. in cost-push in ation.
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Types of In ation 13
• Built-in In ation
- Associated with adaptive expectations is the belief that in ation rates will persist.
- People may expect a similar rate of increase in the future.
- Workers may demand higher prices or salaries.
- Their higher wages raise the cost of goods and services, and the wage-price spiral
continues as one factor induces the other and vice versa.
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Measurement of In ation 14
• Wholesale Price Index (WPI) • Consumer Price Index (CPI)
- Represents the price of goods at a - Indicator of price change for goods and
wholesale stage, i.e., goods that are services used by the households
sold in bulk and traded between - India’s main measure of in ation
organizations instead of consumers. - National Statistics Of ce (NSO), Ministry
- Published by the Of ce of Economic of Statistics and Programme
Adviser, Ministry of Commerce and Implementation (MoSPI)
Industry
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Measurement of In ation 15
Wholesale Price Index (WPI) VS Consumer Price Index (CPI)
Fuel and Power
14% 11%
Other food articles Housing
Manufactured food & Beverages 33% 10% Cereals
Basic Metals 13% 39% Transport & Communication
Chemical Products 9% Fuel & LIght
Textiles Clothing & Footware
Minerals, crude petroleum & Natural gas 12% 7% Health
Cereals 3% 3% 5% Other miscellaneous
Other Manufactures 7% 10% 11% 6% 7% Other Food Products
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https://eaindustry.nic.in/pdf_ les/cmonthly.pdf
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Measurement of In ation 17
• Producer Price Index (PPI) • Commodity Price Index
- This index computes the average - A xed-weighted average of a selected
change in the price of goods and commodity’s spot or future prices
services as they leave the place of
manufacture or enter the • GDP De ator
manufacturing process. - Covers the entire range of goods and
- Output PPI and Input PPI are other services as against the WPI/CPI which only
terms for the same thing. has a basket of goods and services each.
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In ation in India 18
A product (or service)
costing Rs. 60-80 in 1980
was priced close to Rs. 1000
in 2021
Source: https://www.macrotrends.net/countries/IND/india/in ation-rate-cpi
Rs.1000 in 1980 is only worth Rs. 63 in 2021!
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December 2023 19
Source: https://www.mospi.gov.in/dataviz-cpi-map
Sector wise in ation 20
Category Current In ation Rate %
Food & Beverages 1.76
Pan, Tobacco & Intoxicants 4.22
Clothing & Footwear 7.46
Housing 3.54
Fuel & Light 14.19
Health 7.57
Recreation & Amusement 6.95
Personal Care & Effects 2.49
Education 3.34
Transportation & Communication 10.9
Household Goods & Services 6.24
https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1899048
https://www.mospi.gov.in/dataviz
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Healthcare in ation 21
Gross
2021 2022 2023
(projected)
Global† 8.2 8.8 10.0
Latin America† 15.1 18.2 18.9
North America 9.1 9.4 6.5
Asia Pacific 9.8 6.9 10.2
Europe 5.6 8.0 8.6
Middle East and 12.4 10.5 11.5
Africa
Source: https://www.indiatoday.in/diu/story/healthcare-inflation-is-increasing-at-double-the-rate-of-overall-inflation-1562254-2019-07-04
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Strategies governments employ to control in ation 22
• Monetary Policy: Raising interest rates reduces borrowing
and spending, cooling the economy and lowering demand
for goods and services.
• Fiscal Policy: Increasing taxes or decreasing government
spending can help to reduce demand in the economy.
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E ect of in ation on personal nance 23
• Reduced Purchasing Power: As prices rise, money
loses value. With the same money, people can buy fewer
goods and services.
• Impact on Savings/investments: In ation devalues
savings. Savings lose value if the interest rate is lower
than in ation. If the returns are less than in ation, the
real return is negative.
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