Why Is Everything So Expensive?
Kamla Devi stands at the ration shop counter in Shahdara, East Delhi, holding a worn cloth bag and a look of quiet disbelief. The shopkeeper has just told her the price of mustard oil. Eighty rupees for a half-liter bottle. She remembers — clearly, stubbornly — that it was forty rupees not so long ago. Maybe five years. Maybe seven. Time blurs, but prices don't. Prices are etched in the memory of every person who has ever had to count before buying.
"When did this happen?" she asks. Not really to the shopkeeper. More to the world.
The shopkeeper shrugs. He didn't set the price. He buys from a distributor who buys from a wholesaler who buys from an oil mill that buys mustard seeds from a farmer in Rajasthan. Each one of them has a story about why costs went up. Diesel. Labor. Rent. Taxes. Packaging. Transport. Each one is telling the truth. And yet, somehow, the total feels like more than the sum of its parts.
Kamla buys the smaller bottle. She adds it to her bag alongside the rice and the dal — also more expensive than last month — and walks out into the dusty street. On the way home, she passes a billboard advertising a new smartphone. "Your life, upgraded," it says, next to a smiling woman in clothes that cost more than Kamla earns in a month. She does not look at the billboard. She is doing arithmetic in her head, the quiet, relentless arithmetic of the poor: what can I buy this week, and what must I do without?
This scene plays out every day, in every market, in every country. The language changes, the currency changes, the commodity changes — but the bewilderment is universal. Why does everything keep getting more expensive?
This chapter is about that question. Not the textbook answer, though we will get there. The lived answer. The one that sits in your stomach when you realize the money in your hand buys less than it used to.
Look Around You
Pick five items your family buys regularly — rice, cooking oil, milk, onions, soap. Write down what they cost today. Now ask your parents or grandparents what those same items cost ten years ago. If you can, find out what they cost twenty years ago. The gap between those numbers is not just arithmetic. It is the story of your family's economic life.
The Memory of Prices
Here is something strange about human beings: we remember old prices with remarkable precision. Ask anyone over fifty what a cup of tea cost when they were young, and they will tell you — two rupees, or fifty paise, or even ten paise if they go far back enough. Ask them what they paid for their first bus ticket, their first cinema ticket, their first sari or shirt. They remember.
This is not nostalgia. This is economic memory. It is one of the most powerful and most ignored forces in how people experience the economy. Economists call the phenomenon "money illusion" — the gap between what money says it is worth and what it can actually buy. But for ordinary people, there is no illusion. The numbers are perfectly clear. The question is why they keep changing.
Your grandmother can tell you that a kilo of wheat was two rupees in 1970. She can tell you that a gold bangle cost three hundred rupees at her wedding. She can tell you the price of a cinema ticket (fifty paise, balcony class) and a bus ride (twenty-five paise, from one end of the city to the other). These numbers are not approximate. They are exact, carried in memory like the names of children and the dates of festivals.
And when she tells you these numbers, there is always a note of something in her voice. Not just remembrance. A kind of mourning. For a world where a hundred-rupee note felt like real wealth. For a time when saving money actually meant saving value, not just paper.
Let us start with the simplest version of the answer for why those prices changed, and then complicate it — because the truth is always more complicated than the simple version.
What Is Inflation, Really?
Forget the textbook definition for a moment. Inflation is this: over time, the same piece of paper buys less stuff.
That hundred-rupee note in your pocket? In 2005, it could buy you a decent meal at a roadside dhaba — dal, rice, sabzi, roti, maybe a sweet. Today, that same note might cover a plate of rice and dal, if you are lucky. The note looks the same. It feels the same. The number printed on it hasn't changed. But something has changed in the world around it.
This is the central mystery. The money didn't shrink. The things got more expensive. Or did they? Maybe the money actually did shrink — in terms of what it can command. This is the difference between what economists call nominal value and real value.
Nominal value is the number on the note. Real value is what you can actually buy with it. When your grandfather says "I earned 500 rupees a month and lived well," he is telling you the nominal number. When you say "But I earn 30,000 and I'm struggling," you are describing a real value problem. Both of you might be right.
Think of it this way. Imagine money is a language, and prices are the meanings of words. If I say "a hundred rupees," that phrase had one meaning in 1980 and a completely different meaning today — just as the word "broadcast" once meant scattering seeds by hand and now means transmitting a television signal. The word didn't change. The world around it did. Money is the same. The numbers on the notes didn't change. But the world in which those numbers operate has transformed beyond recognition.
"Inflation is taxation without legislation." — Milton Friedman
Friedman was a conservative economist, but on this point, almost everyone agrees. When prices rise across the board, it works exactly like a tax — it takes purchasing power out of your hands. The difference is that no parliament voted for it, no budget announced it, and no receipt records it. It just happens, silently, to everyone who holds money.
But here is the important part: it doesn't happen equally to everyone. And understanding why is crucial.
The Chain from Farm to Plate
Let us follow a kilogram of tomatoes from a field in Karnataka to a kitchen in Bangalore. This will teach us more about prices than any equation.
The farmer grows the tomatoes. She spends money on seeds, fertilizer, water, labor. Her cost might be 5 to 8 rupees per kilogram, depending on the season and the rain. She sells to a local trader at the farm gate for 10 to 15 rupees per kilogram in a normal season. She has little bargaining power. The tomatoes will rot if she waits. The trader knows this.
The local trader collects tomatoes from several farms, loads them onto a truck. He pays for labor, crates, and transport to the nearest mandi (wholesale market). His cost adds 3 to 5 rupees per kilogram. He also bears risk — if the truck is delayed, the tomatoes soften. If the mandi is flooded with supply from other regions, prices collapse. His margin is thin and uncertain.
The mandi commission agent takes his cut — typically 6 to 8 percent of the transaction. He provides the link between the trader and the wholesaler. He controls the information — he knows which wholesalers are buying, at what price. This information advantage is worth money. Add 1 to 2 rupees.
The wholesaler buys in bulk and sends the tomatoes to the city, by truck, over roads that may be good or terrible. Diesel costs, tolls, loading and unloading, spoilage (tomatoes are fragile — 20 to 30 percent may be lost in transit). In a country where less than 4 percent of fruits and vegetables go through any cold chain, compared to 70 to 80 percent in developed countries, spoilage is not an accident. It is a systemic failure. Add 5 to 10 rupees.
The retailer — the sabziwala in your neighborhood — buys from the wholesale market at 3 AM, carries the tomatoes to his cart or shop, and sells them through the day. He needs to cover his rent (if he has a shop), his transport (an auto or cycle-rickshaw to the mandi), his own labor, and the fact that whatever he doesn't sell by evening will rot. He also needs to feed his family. Add 10 to 15 rupees.
You buy the tomatoes at 40 to 60 rupees per kilogram.
The farmer got 10 to 15. You paid 40 to 60. Where did the rest go?
It went to the chain. Every link in the chain adds cost. And here is the crucial insight: when any cost rises at any point in this chain — diesel goes up, labor costs rise, a road is closed, a truck breaks down, rains destroy part of the crop — the increase cascades forward, and often gets amplified. The wholesaler doesn't just pass on his extra cost; he adds a margin on top, because his risk went up too. So does the retailer.
This is the anatomy of a price rise.
THE PRICE CHAIN: Farm to Consumer
(Tomatoes, per kilogram, approximate)
FARMER TRADER MANDI AGENT
Cost: Rs 5-8 Cost: Rs 3-5 Commission: Rs 1-2
Sells at: Rs 10-15 Sells at: Rs 18-22 ─────────────┐
────────────────> ────────────────> │
v
YOU (Consumer) RETAILER WHOLESALER
Pays: Rs 40-60 Cost: Rs 10-15 Cost: Rs 5-10
<──────────────── <──────────────── Transport, spoilage
Adds margin Sells at: Rs 25-35
for waste <────────────────
BREAKDOWN OF YOUR Rs 50 TOMATO:
[Farmer: Rs 12 ][ Chain costs: Rs 23 ][ Retail: Rs 15 ]
|____24%________|_______46%___________|_____30%________|
The farmer gets about a quarter.
The chain — transport, middlemen, spoilage — takes almost half.
The retailer keeps less than a third, before his own costs.
Look at that diagram. The farmer, who did the hardest work — plowing, planting, watering, harvesting — gets the smallest share. The chain, which moved the tomato from point A to point B, takes the largest share. This is not because middlemen are evil. Most of them work hard and earn modest livings. It is because India's agricultural supply chain is long, fragmented, and inefficient. Every truck that breaks down, every road with potholes, every cold storage facility that doesn't exist — all of these show up in the price you pay.
Now imagine that diesel prices rise by 20 percent. Every truck in this chain burns diesel. The cost increase doesn't just add once — it adds at every stage. Trader to mandi, mandi to wholesaler, wholesaler to retailer. A 20 percent increase in diesel can mean a 30 to 40 percent increase in the final price of your tomatoes.
This is one reason why fuel prices matter so much in India, far beyond what you pay at the petrol pump. Fuel is woven into the price of everything.
There is another lesson here, one that often gets lost in the debate about "greedy middlemen." The chain itself is the problem, not the people in it. If India had better roads, more cold storage, more direct market access for farmers, and fewer layers of intermediation, the price gap between farm gate and kitchen would shrink. The farmer would earn more. You would pay less. Everyone in the chain would still make a living — just a different living, organized differently.
Some countries have achieved this. In the Netherlands — a country smaller than Haryana — farmers earn 40 to 50 percent of the retail price, because the supply chain is short, efficient, and technology-driven. In India, farmers often earn less than 25 percent. That gap is not cultural or inevitable. It is infrastructural. It is fixable. That it has not been fixed is a political choice, not an economic law.
Think About It
If the government could eliminate two links in the farm-to-consumer chain — say, by building cold storage facilities and allowing farmers to sell directly to retailers — what would happen to the price you pay? What would happen to the middlemen who currently earn their living in the chain? Is this a trade-off? Who wins and who loses? And who gets to decide?
Why Your Parents Could Buy More With Less
Your parents are not imagining things. A government employee in India in 1990 earning Rs 3,000 a month could afford rent, food, schooling for two children, and occasional new clothes. The same job today might pay Rs 40,000 a month — more than ten times as much — but the person may feel they are just barely getting by.
The math tells the story. Between 1990 and 2025, prices in India increased roughly ten to twelve times, depending on what you measure. The consumer price index — the government's basket of goods — went from about 55 in 1990 to over 600 by the mid-2020s (using 2012 as the base year of 100). So if your salary increased ten times but prices also increased ten times, you are exactly where you were. You are running on a treadmill.
But it is actually worse than that, because not all prices rose equally. The things that matter most to ordinary families — food, housing, education, healthcare — rose faster than the average.
Let us be specific. A simple school education that cost a few hundred rupees a year in government fees in 1990 can cost tens of thousands today, even in a modest private school. The shift toward private education — driven partly by the perceived decline in government school quality — has meant that schooling, which was once nearly free, is now one of the largest items in a middle-class family's budget.
Medical costs have risen at 10 to 15 percent per year, far above general inflation. A visit to a doctor that cost Rs 20 in 1990 might cost Rs 500 to Rs 1,000 today. A hospital stay that cost a few thousand rupees now costs lakhs. India's out-of-pocket healthcare spending — the amount families pay directly, without insurance — is among the highest in the world. An estimated 55 million Indians are pushed below the poverty line every year by medical expenses alone.
Housing in cities has become almost unrecognizable in price. A flat in a major Indian city that cost Rs 5 lakh in 1990 might cost Rs 50 lakh to Rs 1 crore or more today. That is a ten-to-twenty-fold increase, against a salary increase of perhaps ten-fold. The gap is real, and it is growing.
So your parents are right. Their money went further. Not because they were wiser or more frugal — though many were — but because the relationship between money and goods was different. And the relationship has changed most painfully in the areas that matter most: feeding your family, educating your children, keeping them healthy, and putting a roof over their heads.
"The problem is not that things cost more. The problem is that money means less." — Said by too many people to attribute to any one
What a Liter of Milk Costs Around the World — And Why
Let us take one simple product — a liter of milk — and see what it costs in different countries. This comparison is more revealing than it looks.
PRICE OF 1 LITER OF MILK (approximate, 2024-25)
Country Local Price In US Dollars % of daily
minimum wage
─────────────────────────────────────────────────────────────────
India Rs 50-60 $0.60-0.72 5-6%
United States $1.00-1.20 $1.00-1.20 1-2%
Switzerland CHF 1.50-1.80 $1.70-2.00 0.5-0.7%
Kenya KSh 60-80 $0.45-0.60 8-10%
Japan ¥180-220 $1.20-1.50 1-2%
Venezuela (varies wildly) $1.50-3.00+ 20-50%+
─────────────────────────────────────────────────────────────────
The dollar price of milk does not vary as dramatically as you might expect — roughly a factor of three between the cheapest and the most expensive. But look at the last column: what percentage of a day's minimum wage does that liter cost?
In Switzerland, one of the richest countries in the world, a liter of milk costs about half a percent of a minimum-wage worker's daily earnings. In India, it is five to six percent. In Kenya, it can be eight to ten percent. In Venezuela, which has experienced extreme economic chaos, it can consume a fifth or more of a day's pay.
This is the concept of purchasing power. The absolute price of something means very little. What matters is how much of your labor — how many hours of your life — you must trade to obtain it. A Swiss worker might earn the price of a liter of milk in two minutes of work. An Indian daily-wage laborer might need to work twenty to thirty minutes for the same thing.
This is why comparing economies using simple exchange rates is misleading. Economists use something called purchasing power parity (PPP) to adjust for this — essentially asking, "How much does the same basket of goods cost in different places?" By PPP measures, India's economy looks much larger than by simple dollar conversion, because goods and services are cheaper here. But that is cold comfort if you are the one paying five percent of your daily wage for a liter of milk.
There is a famous informal version of purchasing power parity called the Big Mac Index, published by The Economist magazine since 1986. It compares the price of a McDonald's Big Mac burger across countries. The idea is simple: a Big Mac is roughly the same product everywhere, so differences in its price should reflect differences in purchasing power. India does not have a Big Mac (McDonald's in India serves a Maharaja Mac instead), but the principle applies. A meal that costs $5 in the United States and Rs 200 in India tells you something about the relative cost of living — and the relative value of labor — in the two countries.
When Money Itself Broke: Three Cautionary Tales
Inflation is not just an inconvenience. In its extreme form, it is a catastrophe — a force that can destroy families, topple governments, and reshape the political landscape of nations. Three stories from history show us what happens when the relationship between money and goods breaks down entirely.
The Roman Empire: When the Coins Lost Their Silver
In the third century CE, the Roman Empire was the largest economy in the Western world. Roman coins — the denarius — were trusted across three continents. Their value came not from any government promise but from the silver they contained. A denarius was worth a day's labor for a soldier, and it had been that way for generations.
Then the emperors started cheating.
Facing endless wars on multiple frontiers and a bloated bureaucracy, they needed more money than the treasury contained. The solution was elegant and disastrous: they reduced the silver content of each coin. Emperor Nero started it modestly around 64 CE — shaving perhaps ten percent of the silver. The coins looked the same. They felt almost the same. But they were lighter, cheaper to produce, and there were more of them.
Later emperors went further. Much further. By the reign of Gallienus in the 260s CE, the "silver" denarius contained less than five percent actual silver. The rest was base metal, often with a thin silver wash to keep up appearances. The coin that had once been a day's honest wage was now a piece of theater.
The result was exactly what you would expect. Prices soared. Merchants, who could tell the difference between good coins and bad ones, demanded more coins for the same goods. Soldiers demanded higher pay. The government minted even more debased coins to pay them. A vicious spiral set in. The more coins the government produced, the less each one was worth. The less each coin was worth, the more coins were needed. The system fed on itself.
What Actually Happened
Between 200 CE and 300 CE, the Roman Empire experienced inflation estimated at 1,000 percent or more. The price of a measure of wheat in Egypt, recorded in papyrus documents, rose from about 8 drachmas in the second century to over 120,000 drachmas by the end of the third century. Emperor Diocletian attempted to fix this in 301 CE with his famous Edict on Maximum Prices — a decree setting legal maximum prices for over 1,000 goods and services, with the death penalty for violators. It failed completely. Merchants simply stopped selling goods, preferring to hoard them rather than sell at the mandated prices. Black markets flourished. Farmers refused to bring grain to the cities. The edict was quietly abandoned within a few years, and the empire eventually split in two.
The lesson is ancient but permanent: you cannot fix inflation by simply ordering prices to stop rising. The underlying cause — too much money chasing too few goods — must be addressed. Diocletian tried to fix the symptom. The disease continued. And two thousand years later, governments still make the same mistake, with the same results.
Weimar Germany: Wallpapering with Money
The most famous inflation in modern history happened in Germany between 1921 and 1923. After losing World War I, Germany was forced to pay enormous reparations to the victors — France, Britain, and their allies. The amounts were staggering — 132 billion gold marks, far beyond what the German economy could generate through normal taxation or borrowing.
The German government, caught between a population that refused to accept more taxes and creditors who demanded payment, did the only thing left: it printed money. Vast quantities of it. The printing presses ran day and night. The Reichsbank, Germany's central bank, obliged the government by converting its debt into fresh banknotes, again and again and again.
At first, the effect was mild. Prices rose, but slowly. Germans noticed, grumbled, and adjusted. Then they rose faster. Then faster. Then the whole system broke.
In January 1921, a loaf of bread cost about one mark. By January 1923, it cost 250 marks. By September 1923, it cost 1.5 million marks. By November 1923, it cost 200 billion marks. Workers were paid twice a day, because if they waited until the end of the day, their morning wages would be worthless by afternoon. People carried money in wheelbarrows. Housewives burned banknotes in the stove because paper money was cheaper than firewood. Some literally used banknotes as wallpaper — it was cheaper than actual wallpaper.
The stories from this period are surreal. A man who ordered a coffee at a cafe for 5,000 marks found that by the time he finished drinking it, the price had risen to 8,000 marks. A woman who left a basket of money outside a shop returned to find the money dumped on the ground and the basket stolen — the basket was worth more than the billions of marks inside it.
The human cost was immense. Lifetimes of savings were wiped out in months. A family that had carefully saved 50,000 marks for retirement — a comfortable sum before the war — found that their savings could not buy a single loaf of bread. The middle class was destroyed. People who had been responsible, frugal, and prudent discovered that their virtue counted for nothing. The discipline of saving, the cornerstone of bourgeois morality, had been a fool's game. The social fabric tore. The bitterness and humiliation from this experience is widely regarded as one of the forces that made the rise of Adolf Hitler possible a decade later.
"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin." — Ernest Hemingway
The trauma of Weimar inflation is so deeply embedded in German culture that it continues to shape policy today. Germany's insistence on balanced budgets, its opposition to monetary expansion in the European Union, its cultural horror at government debt — all of these trace back to the collective memory of a time when the money itself went mad.
India's 1970s: The Quiet Crisis
India's inflation story is less dramatic than Weimar but more relevant to us. In the early 1970s, India experienced a sharp rise in prices driven by multiple factors colliding at once, like monsoon streams merging into a flood.
The 1971 war with Pakistan — which led to the creation of Bangladesh — strained the budget. War is always inflationary; the government borrows and spends massively, but the production of civilian goods stalls. The global oil crisis of 1973 — when Arab oil-producing nations cut supply and quadrupled prices in retaliation for Western support of Israel — hit India hard, since the country imported most of its oil. A severe drought in 1972-73 devastated harvests. Industrial stagnation, caused by the License Raj's strangling of private enterprise, meant supply could not keep up with even modest demand.
All four forces hit simultaneously. It was as if someone had turned on a fire hose of money while simultaneously draining the reservoir of goods.
Inflation hit 30 percent in 1974. For ordinary Indians, this meant a daily assault on their ability to feed their families. Rice, wheat, cooking oil, cloth — everything surged. Queues at ration shops grew longer. Tempers shortened. The political consequences were enormous. Jayaprakash Narayan, the revered independence-era leader who had retired from politics, came out of retirement to lead mass protests against the Congress government. Students in Gujarat launched the Nav Nirman movement, shutting down the state. Railway workers went on a historic strike.
The unrest was so severe that Prime Minister Indira Gandhi declared a national Emergency in June 1975, suspending civil liberties, censoring the press, jailing opposition leaders, and ruling by decree for twenty-one months.
What Actually Happened
India's wholesale price index rose by 25.2 percent in 1973-74 and over 30 percent at its peak in the months that followed. The government responded with a combination of measures: import controls, rationing, forced savings schemes, and monetary tightening. The Emergency period (1975-77) did bring inflation down — partly through genuine supply-side measures like better harvests, and partly through authoritarian suppression of wage demands and price controls. When democracy returned in 1977, the deeper problems remained unresolved. India would not achieve consistently low inflation until the reforms of the 1990s and the strengthening of the Reserve Bank of India's mandate to target inflation at 4 percent (with a tolerance band of 2 to 6 percent), formalized in 2016.
The 1970s taught India a lesson it has never fully forgotten: inflation is not just an economic number. It is a political force. Governments rise and fall on the price of onions. This is not a metaphor. In 1998 and again in 2010, sharp rises in onion prices became national crises, leading to emergency policy responses — export bans, import orders, raids on hoarders — and, many observers believe, influencing election outcomes. The former finance minister and agriculture minister Sharad Pawar once reportedly said that no Indian government has ever survived an onion crisis.
Think About It
Why might the price of onions be more politically explosive than the price of, say, televisions or mobile phones? What is different about everyday necessities versus occasional purchases? What does this tell us about who inflation hurts the most? And what does it tell us about who has the power to be heard?
The Two Types of Inflation
Now that we have seen what inflation looks like from the ground — from Kamla Devi's ration shop to the rubble of the Weimar Republic — let us understand the two main engines that drive it. Economists divide inflation into two broad types, and both are real.
Demand-pull inflation happens when too much money chases too few goods. Imagine a village where everyone suddenly receives a government cash transfer. They all rush to the same market to buy the same goods — rice, oil, cloth. But the supply of these goods has not changed. There are only so many sacks of rice in the market. When more people want the same amount of goods, sellers can raise prices — and they do. This is inflation driven by demand.
This is what happened in India during COVID-19 lockdowns in a curious, partial way. The government distributed free food grain, and the Reserve Bank kept interest rates low and liquidity high. When the economy reopened, people had money but supply chains were still disrupted. Demand recovered faster than supply. Prices rose.
Cost-push inflation happens when the cost of producing things rises, pushing the price of finished goods upward. When oil prices go up globally, every factory, truck, and tractor in India suddenly costs more to run. These costs are passed forward — the factory charges more, the trucker charges more, the shopkeeper charges more. Nobody is buying more. Nobody is suddenly richer. But everything costs more because the inputs are more expensive. This is inflation driven by supply.
In practice, both types usually happen at the same time, tangled together like roots under a tree. The 1970s Indian crisis was both — oil shock pushed costs up (cost-push), while government spending pushed demand up (demand-pull). Trying to separate them is like trying to decide whether a fire was caused by the match or the kerosene. Both were needed. Both were present. The distinction matters for policy — you fight demand-pull by reducing money supply and cost-push by increasing production — but in the real world, the two are almost never pure.
TWO ENGINES OF INFLATION
DEMAND-PULL: COST-PUSH:
More money in pockets Higher input costs
| |
v v
People want to buy more Producers charge more
| |
v v
Same supply, more demand Higher prices passed on
| |
v v
Sellers raise prices Consumers pay more
| |
v v
┌──────────────┐ ┌──────────────┐
│ INFLATION │ │ INFLATION │
└──────────────┘ └──────────────┘
Example: Government Example: Oil price
gives cash transfers shock of 1973
before harvest arrives raised costs of
everything globally
IN REALITY, both engines usually
run at the same time, reinforcing
each other. Separating them is
useful in theory, messy in practice.
Who Gets Hurt? Who Benefits?
Inflation is not a natural disaster that strikes everyone equally. It is more like a flood that drowns the lowlands while leaving the hills dry.
People living on fixed incomes are hurt the most. Pensioners, for instance, receive the same amount each month. When prices rise, their pension buys less. They become poorer without earning less. Workers who cannot negotiate wage increases — daily laborers, domestic help, farmhands — face the same problem. Their wages are sticky; they don't adjust every month. But the price of their dal and rice does.
People with savings in cash or bank accounts lose, because the real value of their savings erodes. If your bank pays you 4 percent interest but inflation is 7 percent, you are actually losing 3 percent of your purchasing power every year. You feel like you are saving. In reality, you are slowly being robbed. After ten years at this rate, your savings have lost nearly a quarter of their real value — even though the number in your passbook is larger than when you started.
Borrowers, on the other hand, can benefit from inflation. If you took a loan of one lakh rupees ten years ago, and prices have doubled since then, your debt is effectively halved in real terms. You are repaying in money that is worth less than the money you borrowed. This is why governments that are heavily in debt are sometimes tempted to allow inflation — it reduces the real weight of their debt. It is also why the very rich, who tend to be net borrowers (financing businesses and investments with loans), are often less bothered by moderate inflation than the middle class, who tend to be net savers.
People who own assets — land, gold, property, businesses — are partially protected, because the value of their assets tends to rise with or faster than inflation. A house bought for Rs 10 lakh in 2000 might be worth Rs 80 lakh today. The owner feels wealthy. But is she? Only if she sells the house. If she lives in it, the house is the same house. It is the money around it that changed.
This is one reason why inequality often increases during inflationary periods: those who own things get richer (in nominal terms), while those who depend on wages and savings get poorer (in real terms). The rich ride the wave. The poor drown in it.
"Inflation is the one form of taxation that can be imposed without legislation." — Milton Friedman
This is worth repeating because it contains a deep truth about power. Nobody voted for inflation. No budget line item says "reduce the purchasing power of the poor by 7 percent this year." But that is precisely what happens. And unlike a tax, which can at least theoretically be made progressive — charging more to those who can afford more — inflation is regressive. It hits the poorest the hardest, because the poor spend the largest fraction of their income on basic necessities, which are often the items whose prices rise the fastest.
The Paradox of Low and Stable
Here is something that might surprise you: a small amount of inflation is considered healthy by most economists. Not zero inflation. Not deflation — falling prices. A gentle, predictable rate of price increase, somewhere around 2 to 4 percent per year in most estimates.
Why? Because a small amount of inflation encourages spending and investment. If you know that prices will be slightly higher next year, you have a reason to buy today rather than wait. Businesses have a reason to invest now rather than postpone. The economy stays in motion. A little inflation is the grease that keeps the economic machine turning smoothly.
There is a more technical reason too. In a growing economy, wages need to adjust — some workers' wages should rise faster than others, reflecting changes in demand for different skills. If inflation is zero, the only way to lower the real wage of workers in a declining industry is to cut their nominal wage — that is, to actually pay them less. But workers hate nominal wage cuts. They resist them fiercely. Strikes happen. Morale collapses. A little inflation solves this problem: you can effectively lower someone's real wage by simply not raising their nominal wage as fast as prices rise. They don't feel the cut directly. It is a lubricant for the painful adjustments that every economy must continuously make.
Zero inflation — or worse, deflation — can be paralysing. Japan experienced this for over two decades, from the 1990s to the 2010s. Prices barely rose, and sometimes fell. This sounds wonderful until you realize the consequences: people delayed purchases ("Why buy today when it will be cheaper tomorrow?"), businesses delayed investment, the economy stagnated. Banks stopped lending because the real value of repayments exceeded expectations. Japan's "Lost Decades" were lost in part because money was too stable.
The trick, as always, is balance. Too much inflation destroys savings and creates chaos. Too little stifles growth. The job of a central bank — the Reserve Bank of India in our case — is to walk this tightrope.
THE INFLATION SWEET SPOT
◄── DANGER ──► ◄── HEALTHY ──► ◄── DANGER ──►
Deflation 0% 2% 4% 6% 10% 20%+
──────────────┼──────┼──────┼──────┼───────┼───────┼──────────
Japan's │ │ TARGET│ │ │ │ Crisis
Lost │ │ ZONE │ │ │ │ zone
Decades │ │ │ │ │ │
│ └───────┘ │ │ │
People stop │ Goldilocks │ Savings │ Chaos,
spending, │ zone: enough │ erode, │ social
economy │ to encourage │ poor hurt, │ unrest,
stagnates │ activity, not │ inequality │ political
│ enough to hurt │ rises │ instability
India's RBI targets 4% inflation (with 2-6% band).
The US Federal Reserve targets 2%.
Neither can control it precisely. But having
a target is better than not having one.
What Can You Do?
Understanding inflation is not just an intellectual exercise. It has practical consequences for every financial decision you make.
If you keep your savings in a bank account earning 4 percent interest while inflation runs at 6 percent, you are losing money — slowly, invisibly, but certainly. Your grandfather's advice to "save money in the bank" was excellent advice when inflation was low and interest rates were higher. In today's India, it may not be enough.
This is why people have historically turned to gold, land, and other assets that hold their value against inflation. Your grandmother's gold jewelry was not just ornament or tradition — it was inflation insurance, one of the most effective investment strategies available to Indian women who often had limited access to formal financial instruments. The gold she bought at Rs 5,000 per tola decades ago might be worth Rs 70,000 or more today. Her money in the bank, growing at 4 to 6 percent, would have grown to a fraction of that.
This does not mean everyone should buy gold or land — these have their own risks and limitations. Gold pays no interest. Land is illiquid and can be encumbered by disputes. But it means you should think about inflation as a silent partner in every financial decision. When someone offers you a return of 8 percent, ask: "After inflation, what is my real return?" That question alone puts you ahead of most people.
And when the government announces a subsidy increase or a pension hike, ask: "Is this increase larger than inflation?" If the government raises pensions by 5 percent but inflation is running at 7 percent, pensioners are actually worse off than before the "increase." The nominal number went up. The real value went down. This kind of quiet deception — whether intentional or not — is one of the most common ways inflation works against ordinary people.
Think About It
If inflation is running at 6 percent per year, how many years will it take for prices to double? (Hint: use the Rule of 72 — divide 72 by the inflation rate. Answer: 72 / 6 = 12 years.) Now think about what this means for a 25-year-old saving for retirement at 60. If they retire in 35 years, prices will have roughly doubled three times — meaning things will cost about eight times as much. Is your retirement plan ready for that?
A Word About Measurement
How do we even measure inflation? The government does it by tracking the prices of a "basket" of goods and services that a typical household buys — food, fuel, housing, clothing, transport, education, healthcare. This basket is called the Consumer Price Index (CPI).
Every month, thousands of price collectors — government employees and contract workers — visit shops, markets, and service providers across the country and record prices. These prices are weighted according to how much a typical household spends on each item. Food gets a higher weight than entertainment, because families spend more on food. The weighted average of all these price changes gives us the CPI number, and the percentage change in CPI over a year gives us the inflation rate.
But here is the problem: whose basket? A farmer in Bihar and a software engineer in Bangalore buy very different things. The farmer spends 60 percent of her income on food. The engineer might spend 25 percent. When food prices rise sharply, the farmer experiences far higher effective inflation than the CPI suggests. The official number is an average — and averages, as we know, can hide as much as they reveal.
There is an old joke: if your head is in the oven and your feet are in the freezer, on average, you are comfortable. The CPI is a bit like that. The official inflation rate of 5 or 6 percent may be accurate on average, but for poor families spending most of their income on food and fuel, the real inflation they experience might be 10 percent or more. For rich families who spend on electronics (whose prices often fall due to technology improvements), cars, and services, the real inflation might be lower than the headline number.
This is why you should never dismiss a poor person's complaint about prices by citing the official inflation number. Their experience is real. The number is an abstraction. And the abstraction was designed around an "average" household that may not resemble any actual household you know.
"Not everything that can be counted counts, and not everything that counts can be counted." — Attributed to William Bruce Cameron (often misattributed to Albert Einstein)
The Bigger Picture
We started with Kamla Devi at the ration shop, holding a bottle of mustard oil that costs twice what she remembers. We have traveled from her cloth bag to Roman coins, from the tomato fields of Karnataka to the printing presses of Weimar Germany, from the oil shock of 1973 to the cold storage facilities that India still doesn't have enough of.
What have we learned?
First, that prices do not rise by magic. There is always a chain — from producer to consumer — and costs accumulate at every link. When you ask "Why is this so expensive?", the honest answer is usually "because a dozen things went wrong between the farm and your kitchen, and each one added a cost."
Second, that inflation is not a single thing. It can be driven by too much demand, by rising costs, by government printing money, by global shocks, or — most often — by all of these together, interacting in ways that are hard to untangle and harder to fix.
Third, that inflation is not neutral. It takes from the poor and gives to the asset-owning. It punishes savers and rewards borrowers. It is, in Milton Friedman's phrase, a tax without legislation — and like most taxes that fall disproportionately on the poor, it rarely gets the political attention it deserves until it becomes a crisis. And by then, the damage is done.
Fourth, that understanding inflation is not abstract knowledge. It is survival knowledge. Every rupee you save, every investment you make, every negotiation over your salary — all of these are shaped by the invisible hand of inflation. Knowing how it works gives you a small but real advantage in the most important game of all: making your money last.
Fifth, that the world is connected, and connections have consequences. A war in the Middle East raises the price of your cooking oil. A policy decision in Washington affects the interest rate on your home loan. A broken road in Rajasthan shows up in the price of tomatoes in Delhi. We live in a web, and every thread in the web can transmit a price signal — usually upward.
And finally, that the question Kamla Devi asked — "When did this happen?" — has an answer that is both simple and infinite. It happened slowly, steadily, continuously, driven by forces that range from a war in the Middle East to a broken road in Rajasthan to a decision made in a government office in Delhi. It happened because the world is connected, and every connection is a potential link in the chain of rising prices.
The next time you stand at a counter and feel that quiet shock at a price, you are not just a consumer. You are a witness to the largest, most complex, most consequential process in economics. Understanding it is the first step toward not being helpless in the face of it.
"The difficulty lies not so much in developing new ideas as in escaping from old ones." — John Maynard Keynes
Kamla Devi will be back at the ration shop next week. The price may have risen again. But if she understands even a little of why, she is no longer just a victim of the system. She is a participant in it — one who can ask better questions, make better choices, and demand better answers from those who have the power to change things.
That is what economics is for. Not to make you rich. To make you less powerless.