How Inflation kills investing returns
Inflation and investing , I often revisit this quote when I am reviewing my portfolio
Inflation is a tax one has to bear irrespective of whether one is investing or not.
The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation or pays no income taxes during years of 5 percent inflation. Either way, she is ‘taxed’ in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120 percent income tax but doesn’t seem to notice that 5 percent inflation is the economic equivalent ~ Warren Buffet
I had an opportunity to visit India after almost a year and I took this opportunity to do a dip stick test on inflation
Cautionary Note : I was in Kolkata for 15 days and my experiences may be totally irrelevant and give an inaccurate view to you, Some companies / sectors are discussed below this post is not a recommendation to buy or sell
First day, while filling petrol for car noticed that petrol prices have gone down but not to the tune of fall in internationally crude prices , after some googling pulled out this one !
Falling crude’s benefit is not entirely flowing back to consumers – it is improving government’s fiscal situation and improving oil marketing companies balance sheets (which is not bad)
Now having realised that direct benefit due to fall in crude prices to car owners was limited, I turned to private public transport operators
- Check 1 Taxi fares didn’t go down
- Check 2 Bus fares were same as well
In newspaper you are reading everyday about falling crude prices but sadly transporters are not putting bucks back in your pocket
Next I turned my attention to real estate, this is the space where I did find softness in prices however nothing major. Average per square feet rates in my locality were still INR 6200 – 7000. However most startling revelation was high rent yield in Kolkata compared to other Indian cities
A recent report by a global real estate consultancy firm put the average rental yield in Indian Tier-1 cities quite low, with Delhi around 2 per cent and Mumbai around 3.5 per cent, however few flats which I checked were providing rent yields in the range of 4.5 to 5%. For yields to go down prices have to appreciate but demand situation is not great so huge price appreciation is not expected by brokers. All in all good times to be a landlord
FMCG companies have definitely increased their prices 9-12% whether I purchased HUL’s Dove or Marico’s Parachute hair oil, Street food price increased as well, my favorite road side Manchurian was 30% pricey at an street outlet near my home
A movie outing for two adults had a cash outlay of INR 1200 ( USD 20) up YOY 20%, branded clothes were expensive to the tune of 12-15% , pretty much everything was cheap 10-25% online on sites like Flipkart, Myntra and Snap deal. In fact I could see a blue dart guy every day in my building carrying packets of the stuff people bought online
Bata also had raised prices substantially similar shoes bought last year cost me 15% less, however there was palpable energy missing among employees additionally there were hardly any new designs on offer
Milk & vegetables prices were also up about 6-9% more than last year
All in all I could say life on ground was 10 -15% more expensive than last year
What does this mean for individuals ?
With expenses increasing at such speed did income kept pace, sadly I didn’t had a huge sample group but salaries were not keeping pace with inflation
Will this situation continue ? Prices definitely can’t surge 10-15% year on year as then it will lead to an uncontrollable situation like we have one in Zimbabwe
If you are not self-employed or own a business you best bet to combat inflation as a salaried person is to add secondary source of income. I am not saying you need to invest in equity markets to beat inflation, although that’s one option. Start will small goals of diversifying 2% of your annual income and then raise the bar every year
What does this mean for investors?
As investors our number one goal should be to not to lose purchasing power in future therefore we have to beat inflation forget about beating benchmarks and mutual funds returns just ensure you can buy in future what you can buy today, any addition would be icing on cake
What’s your feel on ground for inflation in India ? Share in comments