INFLATION
It is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every rupee you own buys a smaller percentage of a good or service. The value of a rupee does not stay constant when there is inflation. The value of a rupee is observed in terms of purchasing power, which are the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a Re1 pack of candy will cost Rs 1.02 in year. After inflation, your money can't buy the same amount of goods it could beforehand. Inflation is the percentage change in the value of the Wholesale Price Index (WPI) on a year basis.
Measurement of Inflation
Increase or decrease in general price level is measured against price level of some reference year called base year. Inflation is expressed as percentage increase in the general price level with reference to base year of the given basket of commodities.
Inflation = current prices-base year prices/base year prices * 100
Classification of Inflation
Inflation is classified on the basis of increase in price. In some countries, inflation occur even the state of peace while in some countries inflation occurs during the time of war.
Thus, inflation can be classified as follows
Creeping Inflation
This inflation is a slow inflation. In this type of inflation, price increase about at the rate of 2-4% per year, so slow increase in price is not taken as bad.
Trotting Inflation
Trotting inflation occurs when the percentage has risen from 5-10%. At this level it is a warning signal for most governments to take measures to avoid exceeding double-digit figures.
Galloping Inflation
When inflation rises to 10-20%, it wreaks absolute havoc on the economy. Money loses value so fast that business and employee income can't keep up with costs and prices. Foreign investors avoid the country, depriving it of needed capital. The economy becomes unstable and government leaders lose credibility. Galloping inflation must be prevented.
Moderate Inflation
This can be differently defined around the world, given the different inflation histories. As an indication only, one could consider inflation as moderate when it ranges from 15-30%. For some countries, the higher part of this range is already 'high inflation'.
Hyperinflation
Hyperinflation is when the prices skyrocket more than 50% a month. It is fortunately very rare. Infract, most examples of hyperinflation have occurred when the government printed money recklessly to pay for war. Examples of hyperinflation include Germany in the 192s, Zimbabwe in the 2000s and during the American Civil War. It is generally considered as hyper inflation and at this stage it is almost uncontrollable because it increases more rapidly in such a little time frame.
Demand Pull Inflation
Demand-pull inflation occurs when the consumers, businesses or the government's demand for goods and services exceed the supply; therefore the cost of the item rises, unless supply is perfectly elastic. Because we do not live in a perfect market supply is somewhat inelastic and the supply of goods and services can only be increased if the factors of production are increased. It involves inflation rising as real gross domestic product rises and unemployment falls.
Main causes of demand pull inflation are
- Quick increase in consumption and investment.
- Sudden increase in exports.
- A lot of government spending
- Excessive monetary growth.
Cost-push inflation is caused by an increase in production costs. It is generally caused by an increase in wages or an increase in the profit margins of the entrepreneurs. When wages are increased, this causes the business owner to in turn increase the price of final goods and services which would be passed onto the consumers and the same consumers are also the employees. As a result of the increase in prices for final goods and services the employees realize that their income in insufficient to meet their standard of living because the basic cost of living has increased.
The impact of inflation in Indian economy decreases the purchasing power of dollar and increase the value of goods and commodities, especially those that comes from other country.
The effect of inflation of different sectors are given below
Manufacturing Categories
Businessman, farmer, industrialist comes under this sector. Generally, they got benefit due to inflation because the cost of good increases in the period of inflation and opportunity of direct benefit increase.
Salaried Categories
Inflation usually hurts your buying power. That’s because rising prices means you have to pay more for the same goods and services. Inflation can help you if you are the lucky recipient of income inflation. If your income increases at a slower rate than general inflation, you’re buying power declines even if you are making more.
Consumer Categories
Inflation is not good for consumer. Because buying power decline and prices of goods increases. Consumer takes minimum good comparison to previous time.
Debtor and Creditor Categories
Benefit comes under debtor categories in the session of inflation in the compression of creditors. Reason is the value of money decreases and interest rate same like previous time.
Investor Category
An investor is a person who allocates capital with the expectation of a financial return. The types of investment include gambling and speculation, equity, debt securities, real estate, currency, commodity, derivatives such as put an call options etc. The impact of inflation on your portfolio depends on the type of securities you hold. If you invest only in stocks, worrying about inflation shouldn’t keep you up at night. Over the long-run, a company’s revenue and earnings should increase at the same pace as inflation. The combination of a bad economy with an increase in costs is bad for stocks. Also, a company is in the same situation as a normal consumer – the more cash it carries, the more its purchasing power decrease with increase in inflation.
Deflation
A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.
