The inflation illusion is something that our mind is not to accept easily. Inflation is the biggest factor that acts like a silent destroyer of our wealth. We hardly visualize it mainly because it’s a slow poison to our wealth.
Let me explain the same with few simple examples like how our mind is not ready to accept. Here, I am taking two scenarios. One is of the past and another is of the future.
Let us assume that currently, your age is around 40 years. When I say 20 years back, our household expenses used to be around Rs.20,000, then you accept it. Because you might also go through the same budgetary household spending.
If we include 8% of inflation to this Rs.20,000, then in today’s value it is around Rs.86,000. To lead the comfortable with the basics, one may need this much in the current scenario. As we were aware of Rs.20,000 expenses 20 years back and as our current expenses are also true of around Rs.86,000 to Rs.1 lakh, we easily accept it.
In fact, you might have heard from many old people saying that the household expense when they were young maybe around Rs.50 to Rs.100. Also, you might have heard from the same old people that their income used to be around Rs.200 to Rs.500.
We feel JOYOUS by dreaming of past expenses. Because the numbers look so small currently.
Let us now consider the same example of 40 years old guy. Assuming the current expenses as around Rs.93,219, inflation of 8%, then when he reaches 60 years (20 years from now), then the same Rs.93,219 will be of Rs.4,34,490!!
As past Rs.20,000 expenses to today’s Rs.93,219 is TRUE, future Rs.4,34,490 MUST also be true. Because in both cases we considered the same inflation rate. However, our mind is ready to accept the past but not the future BIG number.
If we go further and try to calculate the random retirement corpus required for this guy by assuming inflation=return on investment (just for simplicity’s sake), then how much he must have for retirement?
Assuming he will retire at 60 years and a life expectancy of 80 years, an inflation rate of 8% and return on investment are also the same as 8% during retirement, then Rs.4,34,490*12*20=Rs.10,42,77,600. Imagining today of around Rs.11 Cr retirement corpus may shock us. However, all these are true values as we have considered the same inflation rate for past, current, and future. If we draw the same through the graph, then it looks like the one below.
Hence, I call this illusion INFLATION ILLUSION. We are ready to accept the past. Because by standing today the past number looks too small. However, with the same inflation rate, the future numbers turn out to be unimaginable for us.