Expert Explains: What are the real causes of inflation?

There are at least two basic conceptual flaws in this argument. The first is the idea that the total economic activity is given exogenously, by available labour and institutional factors, so that it cannot be affected by macroeconomic policy. Instead, since most economies are not at full employment, macroeconomic policies can affect the level of economic activity. The second flaw in the idea is that the total money supply is a stock that can be fixed by policy. In reality, governments can affect only the base or reserve money and some of the credit provided by the banking system.

This week when you approached the same shop-keeper and paid Rs.100 to get rice, he gave only 4 Kg of rice. He also explained that the price of rice has increased, and now it is Rs.25 per Kg. This article will explain what is meant by inflation and deflation, causes of inflation in India, causes of deflation and try to understand Inflation vs Deflation comprehensively. Many of us might have read these in the newspaper or heard on the News Channel.

Companies and individuals can borrow cheaply to start a business, earn a degree, hire new workers, or buy a shiny new boat if interest rates are low. In other words, spending and investment are encouraged by low rates, which in turn generally stoke inflation. Inflation could further lead to an increase in costs due to workers what are the 5 causes of inflation demand to increase wages to meet inflation. This might increase unemployment as companies will have to lay off workers to keep up with the costs. Inflation will benefit those people with large debts who can easily pay back their debts when prices rise up. It will hurt those who keep cash savings and workers with fixed wages.

Cost-push Inflation

So, if the inflation rate is 5%, then Rs.10,000 today will be worth Rs.9,500 after one year. If the inflation rate increases to 10%, then the same amount would be worth less in the future. Hence, the purchasing power of investors decreases as the inflation rate increases.

Value stocks are strongly impacted by a change in the rate of inflation. The market price of value stocks is usually directly proportional to the rate of inflation. Therefore, when the inflation rate rises, value stocks tend to perform better. Therefore, they have a negative correlation with the rate of inflation. The market price of these stocks drops when inflation rates rise. When inflation rates increase, the Reserve Bank of India increases the interest rates for deposits and loans.

There are two indexes in India which gives us the numerical figure of inflation and these two are Consumer Price Index and Wholesale price Index . If you can serialize the notes then it will be more useful and sir please update the notes along with time. One way or another, both of these will cause inflation after a period. The Organisation for Economic Cooperation and Development projected a contraction of 10.2% in the financial year 2021 for the Indian economy.

INFLATION: MEASURES

Recession and deflation cause more savings, and people may fear investing their money due to market downfall. The pessimistic approach of people stops them from spending on goods and services. When an economy is globally trading, exchange rates play an essential role in determining inflation. An economy exposed to forex markets primarily functions based on the dollar value.

At the same time, deflation can harm borrowers, who are bound to pay their debts in money worth more than the amount they have borrowed. It is nothing but an increase in the general level of price of the goods and/ or services in an economy over a certain period of time. As per the law of Economics, when the general level of prices increase, each unit of currency buys a decreased number of goods and services. Hence, inflation also reflects a decrease in the purchasing power of money. Economically speaking, inflation is when the purchasing power of a currency declines overtime.

We could realize from this that instead of keeping it idle at home if we would have invested it then we may be better off in 2050. A trusted mentor and pioneer in online training, Alex’s guidance, strategies, study-materials, and mock-exams have helped many aspirants to become IAS, IPS, and IFS officers. As of now in India, there is no index to measure inflation at producer level. A Producer Price Index is proposed, but so far this type of inflation calculation has not started in India.

Inflation in India: In economics, what is inflation?

Here are a few ways you can retire financially sound keeping inflation in mind. This article lists various causes of inflation and the consequences of worst-hit inflation.

This example clearly explains the fall in the purchasing power of money. If price of rice, which was Rs.20 per Kg increased to Rs.25, this corresponds to Rs.5 increase on Rs.20, ie. So the inflation rate is 25%, which is obviously a very high rate. The demand-pull effect states that people will have more money to spend on goods and services in a growing economy. The sudden increase in demand for goods and services will result in companies raising prices that cause inflation. The current macroeconomic policy responses to inflation in the advanced economies, namely tightening monetary policy and raising interest rates, do not address the real causes.

Though a high rate of inflation is not good for the economy, a mild inflation, say under 3%, may turn, at times, useful for the economy. As we hinted in the beginning, inflation can occur because of high demand too. High demand on scarce resources will automatically increase prices. After several years of high inflation, the fall in prices could help improve the demand for goods and services in India, which will help accelerate economic growth further.

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In India, the Ministry of Statistics and Programme Implementation monitors inflation. Inflation refers to the rise in the prices of most goods and services for daily or common use, such as food, clothing, housing etc. Globally, the situation remains similar to most countries facing an increase in the cost of food, oil and other essential goods while wholesale prices also continue to increase. An increase in the cost of general commodities like food, fuel and energy are reflected in the core price index, which measures inflation. Having studied inflation rate measurement at different levels, now let’s focus on two terms related to inflation.

Deflation is the opposite of inflation, and it refers to a decrease in the price index of this group of commodities. Inflation is defined as a decrease in a country’s currency unit’s purchasing power. With cash stimulus being given out to prop up the economy during the COVID-19 lockdowns, many households had excess cash to spend.

Lockdowns, working from home, and physical distancing have seen people spend more of their household budgets on food and housing while fewer people buy non-essentials such as flights and clothes. And it can lead to inflation, with incomes falling as millions lose their jobs. The central bank and government manage inflation through different policies and strategies. Businesses tend to cut off employees to stay profitable during inflation due to increases in the price of goods and services.

What is a Hybrid Market?

Depleted reserves, booming economic recovery, and under capacity production are some of the additional factors that are driving up the prices of fuel across the globe as well. Coal shortages in Asia, natural gas shortages in Europe and a shortage of petrol across the globe are contributing to increased costs. It is surprising, but excess currency supply is the primary reason for inflation in an economy. Different currency enables everyone to spend more & more, resulting in a reduction in currency’s value. Also, to balance the demand & supply cycle, prices increase by default in such a scenario. Inflation refers to a general progressive increase in goods and services in an economy.

Controlling the money supply can also help in preventing inflation. The above-mentioned causes of inflation should be regularly checked by the government and the financial institutions in the nation. The balance between demand-pull and cost-push would bring stability to inflation. That said, the general rise of wages to keep up with the increasing inflation will have put less pressure on the economy. In 2008, the country’s inflation rate reached a shocking 231,150,888.87% causing hyperinflation. Printing more notes, cash, or coins that country’s economic growth is only going to devalue the currency and bring it down.

• This is one of the most common reasons for inflation and increasing prices.
• When there is inflation in the country, the purchasing power of the people decreases as the prices of commodities and services are high.
• When inflation proceeds over the quality of goods and services, it is well understood that the value of a rupee does not remain constant.
• Inflation and deflation are the two opposite terms, and therefore, whatever inflation causes, the deflation would affect it differently.
• The Food and Agriculture Organization food price index, which tracks the prices of the most traded food commodities in the world, was at 123.5 points in July against 127.4 points in August.

When cost inflation occurs, it causes the prices of goods and services to rise, resulting in a decrease in supply. As a result, cost inflation can lead to lower economic growth and often causes a decline in living standards. Inflation is the change of price or the decrease in purchasing power of money over a certain period of time.