Inflation and All You Need to Know About it.
Let’s understand what is inflation. According to popular definition, “Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.”. Let’s assume that you forgot 100 rupees in your jeans pocket today and you find it in the year 2040. You will now notice that you can buy fewer items with the 100 rupees you found in 2040 than in the current year.
Inflation of the year 2020 was 6.2% in India and 3.2% in the rest of the world. That means if you had 100 rupees in 2019 than that 100 rupees will be worth 94 rupees at the end of the year 2020. This certainly decreases the purchasing power of the consumer and makes the money less valuable in long term.
The 2 main causes of inflation are demand push inflation and cost-push inflation. The Demand push inflation usually occurs when the economy shows growth or there is an increase in cash flow. Let’s take the example of India. We are a growing Economy and this means people are increasing their earnings. Now, a consumer who has more cash generally prefers to spend more, leading to an increase in prices. Another example can be increasing the money supply. This could also result in inflation. This money can either be directly allocated to the people by the government or provided to the banks and then banks lower the interest rate so more people can take loans and mortgages.
The Second type of inflation is cost-push inflation. This occurs when the supply of the product goes down but there is still demand the product in the market. Let’s take the example, suppose this year there are fewer fruits in the market and due to this the prices of the fruits will increase. This is cost-push inflation.
Now let’s discuss why do we need inflation. It is needed to grow the economy and so the country people spend more and it in-turns grow the economy. This is a self full-filling cycle. The most important reason why we need inflation is to combat the negative effects of deflation. Deflation is worst than inflation. Deflation causes the prices of each good to decrease and in turn, leads to the fall of economies. This can be understood by example let’s say fruit becomes dirt cheap. For the first year, farmers will face losses. But from the second year farmers will not produce fruits and this would trickle down in all industries. This is why deflation is bad.
How to Combat Inflation? There is only one way to combat inflation is to not keep the money in a savings account but invest money in business, property, or stock market. This could be the best way to protect the money. As long as the return on your investment in percentage is higher or equal to the inflation rate your money hasn’t lost its value.
Written by: Dharmik Patel (Instagram: @dharmik2806)
Vociferous Writers (Instagram: @vociferouswriters)
