What is Inflation?
Wikipedia Defines Inflation as:
In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. This post attempts to define inflation rates in simple words and provides you on tips to compute future value of a good or service.
What is inflation in very simple words?
Inflation in very simple words mean value of your money goes down and hence you would need more money to buy same good or service. Let’s take example of a barber, a barber may be charging Rs. 100/- for the hair cut today but in next 10 years the same barber will be charging Rs. 259/- If inflation rate is 10%. So for an effective calculation of inflation the goods and service that you buy with money needs to be constant. In the case of barber haircut today or few years down the line is the same service. Price difference between iPhone 4 vs. say iPhone 10 may not all be because of inflation as both are different products. This is a very simple way of explaining inflation as you know iPhone will use some common components like silicon chips whose cost will increase because of inflation. As in the highlighted example you can see at a nominal inflation rate of 8% something that costs Rs. 10000/- today will cost Rs. 46610/- after 20 years. This is a very simplistic form of definition; you are interested in knowing more about inflation you should Google for variety of articles on the topic. You should also keep in mind that inflation is never fixed for all commodities or services. A consensus figure on inflation percentage for financial year 2013-14 was around 9% but food inflation i.e. inflation on food commodities was much higher. Medical services have time and again seen inflation around 15% percentage. Educational fees have been seeing an increase of around 10% every year. So there is no one fixed percentage inflation percentage for all the goods and services. General inflation percentage that you hear is a generalized inflation percentage covering variety of goods and services. This inflation percentage can be used to project effect of inflation in a generalized way. A quick search on price of say gold or petrol or a doctor’s consulting fees over years will tell you not all commodities or services follow the generalized inflation benchmark percentages that you keep hearing on television every day. You accurately can never predict cost of an item in future as price depends on lots of other factors including inflation, however you can use next segment of this post to get some idea on the cost or the amount of investment value you need to generate to meet your future goals.
Ready Reckoner on inflation
What is the price of a good or service that costs Rs. 1000/- today over next few years. If you want to calculate the value yourself for a different amount scroll down.
|Ready Reckoner for Rs. 1000|
|Inflation (In %)||
Amount Needed After Years
Future Value of a good or Service calculator
How do you create an excel sheet to calculate future value or inflation adjusted amount
- Create an excel sheet
- In Cell A1 enter the present value of the good or service that you want to measure against inflation
- In Cell A2 enter the number of years to the goal
In Cell A3 enter the inflation percentage
- You have to either format this cell as a % OR
- Enter the value divided by 100 e.g. 15% needs to be entered as 0.15
- These two considerations are important else you will not get correct value
- In Cell A4 enter the following formula to get the value you want =A1*(1+(A3))^A2
Ready made inflation calculator
Find below a ready made calculator that you can use to compute value. Enter value in the embedded excel sheet on this page. You can also download this file here for off-line usage. Feel free to modify or distribute the excel sheet as required.