Stop guessing! Use an inflation calculator for investment success

Inflation is the general upward price movement of goods and services over time. Inflation is an important factor to consider when making investment decisions. The impact of inflation can erode the real returns on your investments. This is where an inflation calculator comes into play. It provides a more realistic estimate of future purchasing power and returns on your investment. Read on to understand more about inflation calculators, how to use them effectively, and their benefits in mutual fund investment planning.

Understanding inflation and the consumer price index

Inflation refers to the general upward movement in prices of goods and services over time. For example, if a kilo of rice costs Rs. 40 today, it may cost Rs. 44 a year later indicating a 10% inflation rate. This means your Rs. 40 can buy less rice than it could earlier.

Consumer Price Index or CPI and Wholesale Price Index are scales that help us measure inflation. While WPI measures an increase in wholesale prices, CPI measures an increase in retail prices in India. Since 2013, CPI is used as a measure to calculate inflation in India, which is calculated using a basket of two-hundred and ninety-nine commodities. Here is the formula used to calculate inflation in India.

Inflation rate = (Initial CPI – Final CPI/Initial CPI) *100

Where CPI stands for “Consumer Price Index”.

What is an online inflation calculator?

An online inflation calculator is a tool that allows you to calculate the future value of an asset based on the current inflation rate. It accounts for how inflation will reduce purchasing power over time. This helps illustrate the impact of inflation in investment and plan finances accordingly.

Advantages of using online inflation calculators

Estimate future purchasing power - Inflation calculators allow you to input a current rupee value and see how much purchasing power that amount will have in the future based on projected inflation rates. This helps you understand if your investment growth is likely to outpace inflation so the future value will have at least the same purchasing power as today.

Plan savings goals - When saving for long-term goals like retirement or college, you can use an inflation calculator to estimate the future cost in today's rupees. This allows you to calculate how many rupees you need to save now to meet the inflated future cost. For example, you may aim to have ₹50 lakhs for retirement in 30 years but input that future value into a calculator to see you likely need over ₹25 lakhs saved today.

Project investment returns - Inflation calculators allow you to factor in an assumed investment return to see your ending balance in future rupees. This helps you evaluate if your projected returns are reasonable to meet your savings benchmarks above inflation. If not, you may need to invest more or find higher return investments.

Conclusion

An inflation calculator is a useful tool to estimate the future value of investments accounting for inflation. Inputting assumed investment returns allows you to evaluate if projected growth keeps pace with inflation. Carefully considering inflation using online calculators can lead to more informed investment decisions and improved chances of achieving future financial goals.