Inflation refers to understanding how the prices increase over time. Inflation quantifies the rate at which money becomes less valuable or loses its purchasing power. The average price increase of a specified basket of goods and services over one year is used to compute the inflation rate.
An inflation calculator calculates the impact inflation has on your money. It helps in finding out how much money you will need to meet your current expenses in the future. All this is calculated while keeping inflation in mind. Here are a few things that go in an inflation calculator India.
- Value of current expenses
- Annual inflation rate
- Time period (in years)
How to Calculate Inflation Rate in India
If you want to understand how to calculate inflation rate in India, you must also know that there are two measures of inflation - the wholesale price index & the consumer price index. In India, inflation is calculated using the consumer price index. The weighted average value of each is used to assess changes in goods and service pricing.
CPI = (Cost of Fixed Basket of Goods and Services in Current Year/ Cost of Fixed Basket of Goods and Services in Base Year) x 100
Remember to get the CPI for two years to calculate the inflation rate.
Inflation Calculation Formula
You must have the CPI values to understand how to calculate the inflation rate. You can get the CPI values using the formula mentioned above. Once you have the CPI values, you can use theinflation calculator formula mentioned below:
Inflation = ((CPI x+1 – CPIx)/ CPIx)) x 100
All the inflation calculators work on this formula and offer you an instant result.
How to Use ClearTax Inflation Calculator
Using the ClearTax inflation calculator, knowing and understanding how inflation can affect your overall savings is very easy. To use the calculator, follow the below steps:
- Enter the value of the current expenses.
- Mention the inflation rate percentage. It should be the current rate.
- Enter the period in years for which you want to understand the future price.
- The calculator will tell the exact amount based on your entered information.
You can even use it as an inflation calculator by year to understand how the prices will change.
How to Calculate Future Value
You can use the future value calculator or the formula below to calculate this value. This value is the value of a particular asset in the future on a specific date based on a certain growth rate. The formula for calculating future value is:
FV = PV*(1+i)^n
In this formula,
- PV = present value of the goods
- I = interest rate
- N = number of periods
Let’s understand how to calculate this value using an example:
Let’s assume Ajay holds an asset and wants to know its value in the future. The different components that are required are as follows.
PV = 2,50,000
I = 12%
Time period = 5 years
So, FV = 2,50,000*(1+12%)^5 equals to 4,40,585
Inflation Rate in India for the Last 10 Years
The below table represents the Indian inflation rate from 2013-2024:
Year | Average Inflation Rate | Annual Change |
2013 | 10.02% | 0.54% |
2014 | 6.67% | -3.35% |
2015 | 4.91% | -1.76% |
2016 | 4.95% | 0.04% |
2017 | 3.33% | -1.62% |
2018 | 3.94% | 0.61% |
2019 | 3.73% | -0.21% |
2020 | 6.62% | 2.89% |
2021 | 5.13% | -1.49% |
2022 | 6.7% | 1.57% |
2023 | 5.49% | -1.21% |
2024 (Feb) | 5.09% | -0.4% |
Data source: World Bank
Impact of Inflation on Savings
Let’s understand how inflation impacts your savings using the cost of a product or service. For instance, if today the expense of child education is INR 15,00,000/-, this rate will change with inflation. Now, if there is an inflation of 6%, you will have to save another 6% for your child’s education. So, with this inflation rate, the cost of education in the next ten years will be INR 26,86,000/-.
With inflation, the same goods or services are expected to cost more in the coming future. That is why investing and saving money is imperative to fight inflation.
Benefits of Inflation Calculator
There are many advantages to using an inflation calculator. Besides, this calculator also helps in understanding the economy's condition and thus helps adjust income and expenses accordingly. Let’s look at some of its benefits below:
- Preparing for rising costs - The inflation calculator assists businesses and individuals to prepare for rising costs over time. This tool may help you understand how the prices will increase, thus allowing you to adjust your savings and financial plans accordingly. This helps reduce the financial stress of meetings and manage essential expenses.
- Informed business decisions - Inflation impacts an individual's financial choices, and using an inflation calculator, you can get critical data to make decisions. This tool can help you calculate the impact on savings, purchasing power, and investments. Thus allowing you to adjust your budgeting, retirement planning, and investment strategies.
- Evaluates investment returns - Inflation should be considered when assessing the actual returns on your investments. These calculators can help evaluate whether or not investments give returns. It can help you better secure your financial future by exploring options that may outperform during inflation.
- Educational tool - It is the best tool to help people understand inflation and how it works. If people know the dynamics behind inflation, they will care better for their money.
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