Inflation is when the prices of essential goods increase. India is going through inflation. One may ask – “what’s the problem with inflation?” The biggest problem is when inflation happens, but wages and salaries don’t increase. This means… Suppose your salary is Rs. 25,000 per month. Last month, you bought your groceries for Rs. 2,000. This month, the same Rs. 2,000 will get you lesser quantity of groceries. Last month, you bought 10 bananas for Rs. 50. This month, you can buy only 6 bananas for Rs. 50. So the value of the salary in your hand “shrinks”. If your salary stays the same for many months, the value of your salary shrinks further.
Let me explain the concept of inflation with a simpler example. I have a friend who has the habit of filling petrol for his bike for exactly Rs. 100. He’s been doing this for the last 15 years. In 2010, petrol was Rs. 47 per litre. So he would get 2 litres petrol for Rs. 100. In 2015, petrol price was Rs. 60 per litre and he would get 1.4 litres of petrol for Rs. 100. Now, for the same Rs. 100, he would get less than a litre of petrol.
Inflation is one financial concept that we all should be very well aware of. Our schools didn’t teach enough about how inflation should be the benchmark for every single financial decision and investment we make. I understood the importance of inflation and investing after reading at least 4 books and reading several articles and discussing with many experienced business people. I regularly conduct workshops on “financial planning” where I teach how to make financial decisions based on inflation. If interested, contact me.
Now coming back to the main topic… When inflation happens, who are the ones who benefit from it? It is the business class. Among the business class, the ones who are in high demand and the ones who sell the most essential items in the market. Most of these items are not regulated by the government. So there can be a lot of price rise, but the government cannot do anything about it. If the price of petrol rises today, the price of vegetables increases the very next day or at least within a week. Most business owners increase their prices within 1-2 days after the petrol price increases.
On the other hand, the people who are in fixed jobs will not get a higher salary the next month. Never! The next increase in the salary “may” happen during the next appraisal season. In many unorganised and even well established private jobs, the salary increase has no scientific formula. The organisation decides some criteria and increases the salary by around 1-3% , while inflation is around 7-8%. Government constitutes pay commission once in a few years. By the time the payment commission submits its report, inflation would have increased further. Government employees get the benefit of pay commission hikes in a retrospective manner. However private employees do not get this benefit! Well established corporate jobs at times may have a good 10-15% yearly hike, which easily beats the inflation. If you are a middle class person residing in a big city, you most probably live in a rented house. Even your house owner gets a 10% increase in the rent every year! But if your salary won’t increase by even 3%, you have chosen the wrong sector or wrong job. And your purchasing power will erode every month and every passing year!
If you happen to be in the teaching profession, you’ll see that the fees of the students increases every year by at least 30-40%, but the salary of teachers increases by maximum 1-3% only. A certain university hiked the exam fees twice in the last 4 years. The same university has kept the valuation remuneration for the teachers constant for the last 4 years!
This is one more reason why smart people who want to lead a good life should never get into the teaching profession. Once upon a time, teaching profession was touted as the field where salary may be less, but we do not have much tension at work. Gone are those days. Now, teaching profession has hundreds of targets, and no good pay.
To conclude:
- People in businesses that are in demand get the immediate benefit of inflation. Based on demand and supply, they can fix the price they want, because – fReE MaRkEt!!
- People in fixed jobs don’t get any benefit due to inflation. In fact, fixed jobs people never get compensated for the loss they suffer due to inflation.
- People in government jobs get compensated for the inflation to a good extent due to the “pay commissions”. They even get compensated retrospectively. Although the government may delay the payments, they do get the benefit.
- People in the well paying corporate jobs who get a yearly hike of more than 10% are the ones who are luckier than the government servants. I’ve heard some of my friends in the corporate sector saying that they got a hike of 15-20% in a year. If they jumped to another company, their hike would be around 30%!
- People in private jobs where hike is less than 7% are the worst victims of inflation. Ask teachers what their hike percentage is. You’ll realise the reality! It is less than 3%!
- Let me remind you the worst victims of inflation – the daily wagers. Their minimum wages haven’t increased even a bit in the last 10 years!
