For much of 2022 and this year, globally, investors, governments, central banks and the lay consumers alike are grappling with inflation, or the rate of price rise in goods and services. In the post-Covid, fully opened economy, countries around the world face rising inflation which, though decreasing from the double-digit levels last year, is still elevated.
Every month, we have the consumer price inflation (CPI) figure released by the by the Ministry of Statistics and Programme Implementation (MoSPI).
However, often, we notice that the CPI figures that the MoSPI releases do not seem to represent our own individual family’s rate of price rise. In fact, many times, they seem off the mark from what we actually experience in our household budgets, by 2-3 percentage points.
Investment advisors, planners and personal finance presentations ask us to assume 6-7 per cent as the likely inflation figure while planning for goals, which is again a generic figure.
To be sure, the CPI and the general figure that advisors ask us to assume are important, and a good starting point to set the ball rolling. But a bit more work may be required to arrive at your personal figure.
How then do we make sense of inflation while planning for financial targets – children’s education, marriage, retirement and so on? To answer that, we need to understand how inflation is calculated by MoSPI and how advisors come up with their figures. We can then dwell on coming up with specific rates closer to our goals.
How inflation is measured
The consumer price inflation index of the MoSPI measures the price rise in a basket of goods and services. Each good or service in the basket is given a specific weightage in the construction of the index. A consumer expenditure survey is conducted every five years to analyse consumer spending on various goods and services and to assign weightages to those in the index. Food & beverages are given a staggering 45.9 per cent weightage in the index. No wonder then that when vegetables, cereals, milk and other consumption products rise, inflation rockets upwards. Housing has a 10.1 per cent weightage, while education, transport and health carry 4.5 per cent, 8.6 per cent and 5.9 per cent weightage, respectively.
The short point is that the composition of the basket of goods and services decides the overall inflation figure. Since our own household budget may comprise various items with completely different weightages, the inflation figure may be higher or lower based on the composition.
Financial planners suggest 6-7 per cent as that has been the average figure over the past decade or so. The consumer price inflation has increased at an annual rate of around 6.02 per cent in the last 10 years, according to data from Trading Economics.
Personalising price rise
The easiest method for you to calculate your own family’s personal budget inflation is to record all expenses you incur in a month and over a period of a few years, arrive at the likely figure. It also helps segregate expenses as discretionary, non-discretionary, one-time and so on.
But many aren’t systematic enough to record all their expenses. And even so, there are other key goals such as college education fees, healthcare, marriage and retirement whose costs grow at different rates.
Consulting firm Aon publishes a medical trend rate report every year that gives the prevailing medical inflation. The report for 2023 gives a price rise figure of 12 per cent. It was 13 per cent in 2022.
A report from BankBazaar states that education costs have risen at 11-12 per cent each year over the past decade.
And marriage is a different game altogether as you will have to deal with gold price rise, food inflation and rising costs of apparel, hall rentals and the like.
Overall, here are some safe assumptions you can make to save adequately for various goals.
For medical and hospitalisation expenses, it is safe to assume double-digit inflation for the foreseeable future. You must calculate and ensure an adequate sum assured based on this calculation and bolster it with a super top-up cover when needed. More so, if your family members have a history of chronic or other serious illnesses.
In the case of education too, you need to factor in double-digit inflation.
You can perhaps keep regularly checking the fees section of the websites of some premier and other popular colleges and institutes to get a good idea of how tuition and other costs keep changing over the years to recalibrate the inflation figure and plan your saving process accordingly.
For marriage, too, we can safely assume 10 per cent or higher inflation, given that it involves multiple sub-segments.
Finally, while calculating the costs for retirement, you can consider the long-term CPI average or take the safer option that planners generally give of 6-7 per cent. Higher the inflation assumed, better the margin of safety.
All these are broader ways of going about planning and would broadly serve investors in doing all the planning themselves. For others, it would be better to sit with their investment advisor to plan for goals even more systematically.