What do you do when Inflation rises?

Financial Planning | admin | December 18, 2010 at 6:34 pm

A lot of people have been complaining about how everything seems to be getting more and more expensive. Lately inflation in India has been rising on a constant rate. Every asset class has gone up. An apartment in Bombay that used to cost Rs 3 crore a year ago suddenly is now being sold for Rs 4 crore. Not just real estate but everything from petrol prices, to energy costs to onions, all has risen rapidly. Someone was telling me how expensive it has become to buy gold for his daughter’s wedding and complaining about things.

I completely agree inflation has risen quite a lot. But fortunately or unfortunately, the reality is that inflation will keep rising in the long term as more and more money is printed. Think of the price of an asset ten years ago and compare it today. Ten years ago, Bank of India at Rs 12 seemed expensive to a lot of people, today it is over Rs 400. Gold at Rs 2500 seemed expensive to people at a time, today it is Rs 20,000. Real estate seemed expensive to people at Rs 10 lakh at a time, today the same is worth over Rs 4 crore.

During the 2008 crash, we had a phase when everything got cheaper, but at that time people forgot to buy assets, instead they became cautious and started saving money. The reality is that, what most people consider saving money is not really saving. When banks give you even 8 or 9% interest rate, and the real world inflation is over 20% -25%, you are losing money.

What I have learnt is that, every time we are faced with a crisis, we should look for an opportunity. When petrol prices, are rising, we should try and find a way to benefit from them. When inflation is rising, we need to find out how we can benefit from it.

Now for instance let us say the government raises petrol prices, on one hand, most people will complain about paying higher petrol prices. They will sit in their Rs 5 or Rs 10 lakh rupee car, and complain, but very few will think about how they can benefit from the extra profits that come in from this rise in petrol prices.

Petrol is a basic necessity, when prices go up; people have no choice to pay. This is a sort of monopoly in terms of pricing, even Rs 2 increase in petrol prices, means thousands of crore in profits for a select few. Why don’t more people start thinking how they can benefit from these increasing profits in the coming years?

Rising petrol prices cause increase in inflation, everything becomes more expensive, but in the real world we need to look at everything as opportunity. Either, we can crib and complain about everything, or be optimistic and opportunistic. I would rather be optimistic and opportunistic, it helps me think better and look for opportunities where others aren’t.

When inflation rises, it is best to look for assets that will rise faster than the normal rate of inflation. It helps to look at assets, which everyone is complaining about. If everybody around you is complaining that petrol prices are rising, may be you should invest in oil marketing companies, if you feel onions are becoming expensive, maybe it makes sense to invest in onions. In fact onions would have given you a return of over 120% in the past one year. Another interesting thing is that to invest in onions, you don't really need a lot of money.