Life
General
Claims
Resources
Simplifying Life Insurance in India
What is Inflation - Meaning, Working, Calculation, & How to Overcome
You must have noticed how the price of all items grows gradually. The reason behind this is inflation, a phenomenon that reduces a currency's relative value. As a result, you need to pay more to purchase a good or avail of a service year after year.
You need to know how you can beat its impact on your financial stability. However, before that, you must know what inflation is in detail, along with its types and causes.
What Is Inflation?
Inflation is the rate at which goods and services prices increase over time. You can also see inflation as a relative decrease in the overall value of a currency. As a result, you need to spend more of your currency to buy a specific commodity or service.
A moderate level of this price hike is necessary for a country's economy. It is favourable for both businesses and common citizens. Under such economic conditions, individuals can easily purchase items, borrow credits and increase their economic opportunities. However, during over-inflation, prices of daily necessities increase so much that it becomes difficult for people to afford them.
To clearly understand what inflation is, you should also know how it is calculated.
What Are the Ways to Calculate the Inflation Rate?
What Is Inflation Calculation Using WPI?
WPI is the average price of a basket of commodities at their wholesale level. An increase or decrease in the percentage of this index against the base year shows a country's inflation rate.
In India, RBI used to leverage WPI to measure this rate until 2014. The Ministry of Commerce and Industry was responsible for calculating WPI by averaging prices of 697 particular items at their wholesale level. The basket of commodities used by the Department of Commerce included the following three groups of items:
- Manufactured Products: Accounted for 65% of the total weight of WPI
- Primary Articles (mainly food items): Accounted for 20.1% of the total weight of WPI
- Fuel and Power: Accounted for 14.9% of the total weight of WPI
In 2014, the RBI governor changed the base index for inflation calculation from WPI to CPI. Its primary reason was that the WPI does not consider price-hikes of services.
What Is Inflation Calculation Using CPI?
The consumer Price Index (CPI) measures the average selling price of both services and products at the consumer level. It includes the price of clothing, food and other commodities, along with the prices of transportation, electricity, etc. The inflation rate is the change in CPI in a particular year concerning the base year.
In India, CPI is calculated considering the price of 260 different products and services. With the help of the Central Statistics Office, the Ministry of Statistics and Programme Implementation tracks the changes in CPI.
The respective government departments collect the price data from 1114 urban and 1181 rural markets throughout India. After data collection, they calculate the CPI by averaging prices of commodities.
What Are The Different Types of Inflation?
Inflation is categorised into several types according to pace. Here are various types of inflation:
- Creeping Inflation: Prices rise by 2% or less
- Galloping Inflation: Prices increase by 10% or more
- Hyperinflation: Prices increase by 50%
- Deflation: Negative inflation; prices drop
Why Does Inflation Occur?
The following are the different causes of inflation:
- Demand-Pull Inflation: In this case, the aggregate demand for goods and services increases concerning overall supply in the market. It occurs for several reasons, including supply shortfalls, economic booms, an increase in money supply, etc.
- Cost-Push Inflation: In cost-push inflation, prices of intermediate goods or production process inputs increase. As a result, the total cost of manufacturing items inflates. Finished products also become costly.
- Built-in-Inflation: People in an economy expect that prices of commodities and services will increase at a moderate rate, as they have previously experienced. This is why workers demand an increase in their wages to sustain their standard of living. The products or services also become costlier year-on-year.
How to Overcome Inflation?
The only possible means to beat inflation is by increasing wealth accumulation. You need to ensure that your overall earnings increase with the falling relative value of money and increasing price of goods and services. This will help you retain your purchasing power.
If you save your money in a bank account or Public Provident Fund (PPF) and earn interest lower than the inflation rate, you will not be able to keep pace with the rising price. Therefore, you need to choose investment instruments that will give you higher rates of returns than inflation. You can choose to keep your money in some mutual funds or equities as they give higher returns.
Now that you know what inflation is, you must understand that increasing earnings is also paramount. Inflation in the economy reduces the currency's value and increases the prices of products and services. As a result, you need to spend more to sustain a basic standard of living.
FAQs About Inflation
How does the government tackle inflation?
What are ideal investment instruments during inflation within an economy?
What is stagflation?
What is the impact of inflation on an existing borrower?
Other Important Articles Related to Inflation and Financial Planning
Important Articles About Financial Planing
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
Latest News
04-03-2025
Life Insurance Agents Surge: 3 Million in 2025
Volkswagen India will launch the Golf GTI and Tiguan R-Line by the end of Q2 2025. The Tiguan R-Line, unveiled in 2023, features aggressive styling, larger 19-inch alloy wheels, and LED light bars. Inside, it boasts a 12.9-inch touchscreen, 10.3-inch digital instrument console, and ambient lighting. Powered by a 2.0-litre turbo-petrol engine with 261bhp and 400Nm, it offers six-speed manual and seven-speed DCT automatic transmissions.
19-02-2025
Life Insurance: FDI Boosts Growth Potential | 2025 Update
The Indian life insurance sector is set to grow significantly with the government's decision to raise the Foreign Direct Investment (FDI) limit to 100%. This move will provide the necessary capital for industry expansion, allowing insurers to increase mortality coverage and market penetration. Private insurers have already seen a notable rise in retail sum assured, outpacing new business premiums. The shift to unit-linked investment plans (ULIPs) may pressure margins, but increased capital inflows will help meet the growing demand for coverage.
12-02-2025
Budget 2025 Brings Changes to ULIP Taxation
The Union Budget 2025 has redefined the taxation landscape for Unit Linked Insurance Policies (ULIPs). Starting April 1, 2026, ULIPs with annual premiums exceeding ₹2.5 lakh will be classified as capital assets, subjecting their gains to capital gains tax rather than treating them as income from other sources. This amendment aims to align ULIP taxation with other equity-oriented investments, ensuring a uniform tax treatment across financial products. Policyholders are advised to reassess their investment strategies in light of these changes to optimize their tax liabilities.
02-02-2025
New Tax Rules for Life Insurance Premium
Starting April 1, new income tax rules will impact ULIPs and other life insurance policies with premims over 5 lakh will no longer enjoy tax-free maturity benefits under Section 10(10D). This move aims to align insurance with genuine risk coverage rather than high ticket investments. Smart investors might now explore alternate tax-saving strategies!
12-12-2024
Policyholders Now Get Increased Surrender Value
The new business premium of life insurers was Rs 377,960 crore in the fiscal year ending March 2024. Starting October 1, policyholders will receive higher refunds if they discontinue their policies, as per new IRDAI regulations. This change may lead to increased premiums, impacting insurers' margins. Policies must comply with the new surrender value norms by September 30. Despite initial opposition, the changes aim to improve customer benefits and are expected to positively impact the insurance industry over time.
10-12-2024
Premium Costs for Life Insurance Decrease in November
In November 2024, new business premiums (NBP) of life insurance companies fell by 4.5% year on year (YoY) to Rs 25,306.56 crore, mainly due to a 27.17% drop in LIC's premiums. However, private insurers saw a 30.84% YoY growth in NBP to Rs 13,555.45 crore. Revised surrender value norms, effective October 1, led to enhanced special surrender values for policyholders. Despite the overall decline, private sector growth improved, cushioning the fall. The life insurance industry saw a 15.7% YoY growth in NBP during April–November 2024.
18-11-2024
Govt's FDI Plan: New Insurance Rules
The government plans to allow 100% foreign ownership of insurance businesses, attracting international companies. This proposed legislation also lets individual insurance agents offer policies from multiple companies. The changes are part of the Insurance Amendment Bill, set for introduction in the winter session of Parliament. These measures aim to increase insurance penetration, currently at 4%, by allowing more companies to underwrite policies and enabling agents to sell various covers.
08-11-2024
Record Growth: Life Insurers Boost Premiums 18.56%
The Life Insurance Council reported a 13.16% year-over-year growth in October 2024 New Business Premiums (NBPs), reaching ₹30347.6 Crs, up from ₹26819.01 Crs in October 2023. Year-to-date (YTD) collections also increased by 18.56%, from ₹185195.81 Crs to ₹219561.64 Crs. This growth is attributed to life insurers' focus on first-time buyers. Despite this, new policy issuances dropped by 41.6%. Individual single premiums grew by 8.60%, with overall YTD growth at 14.16%.
01-10-2024
Higher Refunds for Life Insurance Policyholders from October 1, 2024
Starting October 1, 2024, policyholders who surrender their traditional endowment life insurance policies will receive higher refunds due to new rules from India's Insurance Regulatory and Development Authority (Irdai). The exceptional surrender value (SSV) will be increased, providing more flexibility and liquidity. This change benefits those exiting policies early, offering refunds even after the first year. Insurers must now include detailed surrender values in policy illustrations, enhancing transparency for policyholders.
23-07-2024
TDS on Life Insurance Payouts Reduced
Starting October 1, 2024, the tax deducted at source (TDS) on life insurance payouts will be reduced from 5% to 2%. This change, part of the Budget 2024 proposals announced on July 23, aims to increase liquidity for policyholders. The reduction applies to payouts under section 194DA, which covers sums paid under life insurance policies, including bonuses, except for amounts exempt under section 10(10D). Life insurance companies have welcomed this move, anticipating it will benefit customers.
Read More
Renew & Download Policy Document, Check Challan, Credit Score, PUC & more
Anytime, Anywhere. Only on Digit App!
Rated App
Rated App
Scan to Download
