Inflation
The rate at which the general price level of goods and services rises.
Real return equals nominal return minus inflation. A 7% fixed deposit against 6% CPI inflation leaves roughly 1% real return before tax, which is why long-horizon goals usually need growth assets.
Why Inflation matters when comparing products
Inflation affects the purchasing power of money over time. When comparing financial products in India, understanding inflation helps assess the 'real' return an investment provides. A higher nominal return might still result in low or negative real returns if inflation is high. This distinction is crucial for preserving and growing wealth effectively, as it indicates how much more one can actually buy with their money after accounting for rising prices.
Illustrative example
If a fixed deposit offers a 6% annual return, and the inflation rate for the year is 5%, the real return on that investment is approximately 1%. This means that after a year, while your money has grown by 6% in nominal terms, its ability to purchase goods and services has only increased by 1% due to the 5% rise in prices. For every ₹10,000 invested, you effectively gain ₹100 in purchasing power.