``Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.`` - Ronald Reagan
No better day to understand this! If there is one thing that has provided the maximum returns over the past year, then it has to be the humble onion and it`s red Indian cousin tomato. Food inflation is at 14.44%, the Y-o-Y increase in vegetable prices was 29.26%. Despite multiple attempts by the RBI to adjust the liquidity to in turn reduce inflation, they haven`t been able to tame inflation yet.
Understanding Inflation
Inflationary scenario, simply put would be when too many people chase too few goods and too few services, which automatically makes the prices of the goods and services high because of the high demand. At the same time, when inflation falls below the desired mark (in the negative territory); there are few people and abundant supply of goods and services, making the prices of the goods and services cheap. India`s vast population lives close to or below the poverty line, inflation acts as a `Poor Man`s Tax`. This effect is amplified when food prices rise, since food represents more than half of the expenditure of this population.
There are two measures for inflation, Wholesale Price Index and Consumer Price Index, the latter being more accurate in evaluating the change in value of money for the `Aam-Aadmi`. Here is a look at how inflation has fared over the past years -
Source of data: Ministry of financeFrom the above graph, it is evident that inflation is definitely off the peaks, from a whopping 16.22% in Jan `10 to the current levels hovering around 10% - 11%, however, food items continue to suffer.
Impact of inflation on your budget
This is absolutely simple. Over the past year onion prices have risen ~35%, a kilo of onion, now costs a little higher than a liter of petrol, of course petrol itself was not spared either, the prices were revised recently and your outlay to fuel is definitely higher than what you did in the previous quarter.
When inflation is on the rise, it is amply clear that your outlay to the core ingredients of household expenses immediately increases by a similar % as your inflation. Further, inflation affects all without any discrimination, this simply means that your servant maid will demand a higher monthly salary than earlier, for she too has to face the brunt of increasing food items. There are indeed multiple factors which affect the household pattern, the rate hike by the RBI to curtail inflation, will in turn reflect in increased EMI outlay, thereby shrinking your investment / savings portion further.
Let`s assume that your due to the above factors, the core ingredients - food items, medical / clothing / entertainment expenses, ancillary expenses have risen by ~15%, fuel / vehicle maintenance outlay has increased by 10%, EMI outlay has increased by 8%, other expenses have moved up by a modest 8% (lesser than the inflation rate thru- the year) - here is how the pie of your net earnings / expenses / savings pattern would look at the begin of the year and at current times -
Savings / Investments have shrunk by a whopping 10%, atrocious as it may sound; this is clearly how things have panned out for the middle class over the past year. The big question is ``Can the `Aam Aadmi` control this?`` The answer is simply `No`, however, what is within his control is to keep tab on the expense pattern. 
There are various methods of reducing your expenses - some such examples are cutting on eat-outs, walking / jogging in open air instead of a gym subscription, car pooling, using your credit cards prudently etc.,
Your commitments
With the savings pie shrinking, it becomes increasingly tough for you to stay committed to your investments. This calls for prudently planning for contingencies, creating a buffer of 2% - 5% will help counter such adverse scenarios, this buffer can be kept in easily accessible avenues such as savings bank balance, flexi-fixed deposits or liquid plus / floating rate debt funds.
How much EMI you intend to lay out of your net earnings can determine your lifestyle, ensure that you conduct a financial feasibility before embarking on assuming loan liabilities, remember with liabilities comes great responsibilities! As a thumb rule, not more than 30% should be laid out towards EMI.
The movement of Inflation is inevitable, managing your household budget with acumen becomes vital to counter such adverse situations, there is definitely no set rule on how to counter these fluctuations, it is up to you to find your way, being watchful of small spending patterns and digging into detail can go a long way in helping you to fend these fluctuations.
The author is the founder and CEO of Right Horizons, an investment advisory and wealth management company.
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