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inflation
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Understanding Inflation
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Understanding Inflation

We know what happens due to inflation. Do we really know what do we call inflation and why it is happening and what all are its wide spread reactions to the economy of a country? To understand this in detail, we must first know what the definition of inflation is.

Economics terminology defines inflation as the sustained increase in the price of goods and services. This can be due to an increase in the stock of money. But inflation has a direct reaction with the economy of a country.

Suppose we have lot of money with us and we would like to buy some goods which are scarcely available in the market. We would not mind paying extra to get the goods. This increases the demand for the goods and naturally we can expect a sudden rise in the price as a result of the high demand. This is inflation. On the other hand, if let us say we have enough of apples produced and not many people are buying it. To sell the apples, the price may have to be reduced. Otherwise it may get spoiled and go waste. So, we can see a reduction in the price of apples. This is deflation.

Here we have only talked about apples. It is not just apples but there are so many other goods and services available in the market facing similar situations.

At some point, governments would introduce lot of money by printing notes and coins to sustain the economic stability. This brings a surplus of money compared to the goods and services available in the country. This is also another reason for inflation.

Inflation is generally measured using factors like

• Consumer Price Index

• Retail Price Index

Consumer Price Index or CPI is basically the price index of common consumer goods – you can say food items, petrol, electric power and entertainment expenses etc. The Retail Price Index covers the consumer goods but it also includes things like our municipal or corporation tax, mortgage interests. The inflation is measured annually and expressed as percentage. So, the comparison is generally between a particular year and the same period a year before.

When there is an inflation, the purchasing power of money (what we can buy with a particular amount of money) goes down. That is if you could buy something for one dollar last year, the same thing will cost more (according to the percentage of inflation) this year.

When a manufacturing company spends more to produce goods, they have no other option but to increase the selling price of the finished goods to balance the profit margin. Otherwise they have to cut production to reduce the cost to maintain the same pricing. When production is cut there will be shortage of goods in the market and in return there will be an increase in the price as the dealers cannot balance the supply and demand. So there is a cyclic reaction during inflation.

When there is an inflation, to sustain the stability, some even try to reduce the quantity and quality of the supply, maintaining the same selling price. We could see the size of biscuits reducing to maintain the same retail selling price per packet. When we go to a hotel, we notice less quantity of food served for the same price. So, one has to spend more money to satisfy the needs or you will have to return half empty stomach.

When the inflation in a country is more compared to other countries, the goods produced in that country will be less competitive in the market. The cost of living in that country goes up. If the government does not respond properly, it can be disastrous. Employees will demand hike in the salary, wages and compensation to meet their living standards.

We cannot easily say that inflation is bad or good as sometimes inflation can be a sign of growth of economy in a country. Without any inflation the country’s economy could also be weakening. But the common man finds it difficult to survive during inflation.


Street Talk

Very good explanation on inflation. Thanks

Reply
  about 8 years ago
Barbara9  

very informative article

Reply
  about 9 years ago
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