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Over the last few years we have witnessed how food prices have risen dramatically.

Understanding Inflation

Over the last few years we have witnessed how food prices have risen dramatically. A pack of 100gm biscuits which cost Rs. 4 now costs Rs. 6 while you could get a 100gm bar of chocolate for Rs. 10 a couple of years back, the same Rs. 10 can only get you 75 gms of chocolate today. This signifies a fall in the purchasing power of money due to a rise in prices. The rate of change in the level of prices of goods and services over a period of time, which affects the purchasing power of money, is termed as inflation.

There are different metrics to track inflation such as Wholesale Price Index (WPI) and Consumer Price Index (CPI). Globally, CPI is the most widely used index as it measures the increase in price that a consumer pays for goods and services. It is also considered as a 'cost of living' index. However, in India WPI is more commonly used. It measures the change in the average price level of a basket of 435 products traded in wholesale markets. The WPI data is announced on a monthly basis.

Inflation eats away not only in to savings but also the returns. It reduces the purchasing power of money, thereby reducing the intrinsic value of an individual's savings. Further, it also reduces the real return which is obtained by subtracting the inflation from nominal returns. For e.g. an investment of Rs 1,00,000 in a bank fixed deposit in January 2012 at an interest rate of 10% pa would get you Rs. 1,10,000 in January 2013. However, during this period inflation was 7.2%, thereby reducing your real rate of returns to mere 2.8%.

Household savings could be seen as either postponed consumption or money put away for wealth creation. If households save on account of postponed consumption then it would be very important that their returns on their savings beat inflation, if they have to be better off, in future. Inflation acts as a tax on your earnings, reducing your ability to spend and forcing you to postpone consumption.

A minimum level of inflation is considered good for the economy as it signals that the economy is growing. It encourages production, investment and consumption in the economy. It is also good for the stock markets as prices of stocks rise in line and companies also report higher profits. Inflation is one of the important factors that influence monetary policy decisions. Anchoring inflation expectations and maintaining price stability is one of the key macroeconomic objectives of the Central Banks across the globe.

To protect from loss on account of inflation it is essential to invest carefully as well to diversify your portfolio. Historically, over long-term, equities have provided the best hedge against inflation as equities have delivered over 19.1% CAGR (as on 31st December 2012) over the last 10 years. Along with financial assets, investing a portion of your savings in physical assets such as real estate or gold can neutralize the impact of inflation.

By far the most important statistics for both, the household and RBI is inflation. The RBI governor in a recent speech candidly says that even he does not know how to interpret inflation. "Twenty years ago, when I had a thick mop of hair, I used to pay Rs. 25 for a haircut. Ten years ago after my hair started thinning I was paying Rs. 50 for a haircut. And now, when I have virtually no hair left, I am paying Rs. 150 for a haircut".

Arpita Nanoti
Head – Investment Communication & Advisory

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Daily NAV's

NAV as on 5/24/2013 (view all NAV)

Assure Fund	20.0224
ULIF01008/07/05BSLIASSURE109
Income Advantage Fund	17.4471
ULIF01507/08/08BSLIINCADV109
Protector Fund	27.2391
ULIF00313/03/01BSLPROTECT109
Builder Fund	33.5637
ULIF00113/03/01BSLBUILDER109
Balancer Fund	21.4382
ULIF00931/05/05BSLBALANCE109
Enhancer Fund	39.6121
ULIF00213/03/01BSLENHANCE109
Creator Fund	29.9662
ULIF00704/02/04BSLCREATOR109
Magnifier Fund	29.2039
ULIF00826/06/04BSLIIMAGNI109
Maximiser Fund	14.5354
ULIF01101/06/07BSLIINMAXI109
Multiplier Fund	12.1365
ULIF01217/10/07BSLINMULTI109
Super 20 Fund	14.8243
ULIF01723/06/09BSLSUPER20109
Platinum Plus Fund - 1	12.492
ULIF01325/02/08BSLIIPLAT1109
Platinum Plus Fund - 2	17.7262
ULIF01425/02/08BSLIIPLAT2109
Platinum Plus Fund - 3	13.6292
ULIF01628/04/09BSLIIPLAT3109
Platinum Plus Fund - 4	12.1116
ULIF01816/09/09BSLIIPLAT4109
Platinum Premier Fund	12.0045
ULIF02203/02/10BSLPLATPR1109
Platinum Advantage Fund	10.2708
ULIF02408/09/10BSLPLATADV109
Pension Nourish Fund	22.7653
ULIF00604/03/03BSLNOURISH109
Pension Growth Fund	27.61
ULIF00504/03/03BSLIGROWTH109
Pension Enrich Fund	31.7068
ULIF00404/03/03BSLIENRICH109
Titanium Fund - 1	11.9874
ULIF01911/12/09BSLITITAN1109
Titanium Fund - 2	11.7473
ULIF02011/12/09BSLITITAN2109
Titanium Fund - 3	10.8401
ULIF02111/12/09BSLITITAN3109
FORESIGHT - 5 PAY	10.9991
ULIF02510/02/11BSLFSIT5P1109
FORESIGHT - SINGLE PAY	11.1365
ULIF02610/02/11BSLFSITSP1109
Pure Equity Fund	11.4635
ULIF02707/10/11BSLIPUREEQ109
Value Momentum Fund	10.7917
ULIF02907/10/11BSLIVALUEM109
Liquid Plus Fund	10.9141
ULIF02807/10/11BSLLIQPLUS109
Discontinued Policy Fund	12.0461
ULIF02301/07/10BSLIDISCPF109