You must have often noticed the increase in price of our daily use commodities. What causes such rise? Why is the rise so worrisome and how does it erode our currency’s purchasing power? Read the story to find out the effect of inflation.
Crux of the Matter
What Is Inflation?
It is rise in general price level of commonly used goods and services and is accompanied by reduced purchasing power of our money. But how?
Price Of Apple
To put it in another way: ₹30 which fetched you a kg of apple in 2010 will be able to get you only 300 gram in 2020. Thus, with inflation, the value or the purchasing power of your money decreases as the same amount of currency now buys lesser quantity of the same goods.
Consumer Price Index
Reasons For Inflation
Cost Push Inflation:
Increase in cost of raw materials leading to rise in the price of final product.
Increase in demand of goods and services that lifts the price of the final product.
Inflation by Printing Money:
Governments in order to stimulate the economy resorts to printing currency, after which,
- Money supply increases.
- Households hold more cash to spend.
- Increases demand of goods and services.
- Price of goods increases.
Is Inflation Bad Though?
- Not really- assume that there is a persistent mild level of inflation in the economy.
- Thus, a good is cheaper today than at some later date.
- This induces consumers to buy now rather than paying higher prices in future.
- Thus demand of the good increases
- This increases demand of goods and services.
- Final outcome: Increase in consumption decrease in unemployment, overall boost in economic growth activities
- Hungary experienced its worst case of hyperinflation from August 1945 to July 1946. It had an equivalent daily inflation rate of 207% and it took just 15 hours for prices to double.