Inflation effects on Investments


1 Answer(s)


The effect of inflation on investment can be better understood with the
following illustration:
Say that your monthly consumption of petrol is 10 litres, costing you ` 500
@ ` 50 / litre. Further, you meet this expense out of the monthly interest
income of ` 500, earned from your fixed deposit. If the inflation rate during
the year is 10%, then price of petrol per litre would increase from ` 50 to `
55 / litre. Accordingly, the next year you will not be able to purchase 10
litres of petrol, now costing ` 55 / litre, out your interest income of ` 500
from your fixed deposit. Hence your financial plan should aim to earn
returns above the rate of inflation.