WHAT IS INFLATION?
If I say that your money is being stolen from your wallet right now. How will you feel?
Suppose if you keep ₹5000 in your locker right now and you open the locker straight after 10 years then you won't have ₹5000 but you only have ₹2000.
[Will discuss the time value of money concept in our upcoming blogs]
Now the question arises who stole this money. The answer is Inflation.
So what is inflation? Let us understand it by an example :
Suppose in 2010 you ₹10 and you want to eat a vada pav(Indian snack) you will buy it. Now with this same ₹10 you won't be able to buy a vada pav in 2021. It will cost you around Rs 50-100 now. This is inflation.
Inflation is a decline of the purchasing power of a given currency because of the rising cost of living. However, when there is a decrease in the rate it is called deflation.
WHAT IS THE INFLATION RATE ?
AND HOW IT IS CALCULATED ?
The inflation rate is the rate of increase in the general price level of goods and services in an economy and how it affects the cost of living of those living in a particular country.
For the inflation rate, we have to first understand the consumer price index, so let's understand it.
WHAT IS CONSUMER PRICE INDEX?
The Consumer Price Index measures the average change in prices over time that consumers pay for a basket of goods and services. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living.
CPI= Cost of Market Basket in Base Year
/ Cost of Market Basket in Given Year ×100
Now let's understand how to calculate the inflation rate.
Authorities in India use price indices to determine the change of rates of goods and services, thus inflation or deflation is calculated. For example, if the rate of rice a year ago was Rs 10 a kilo and currently it is Rs 20 a kilo, the inflation in the rice prices would be at 50 percent.
Formula:
Subtract the past date CPI from the current date CPI and divide your answer by the past date CPI. Multiply the results by 100. That is your inflation rate.
TYPES OF INFLATION
1.COST-PUSH INFLATION : Cost-push inflation occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials. Cost-push inflation can occur when higher costs of production decrease the aggregate supply (the amount of total production) in the economy.
2.DEMAND-PULL INFLATION
Demand-pull inflation is a tenet of Keynesian economics that describes the effects of an imbalance in aggregate supply and demand. When the aggregate demand in an economy strongly outweighs the aggregate supply, prices go up. ... This leads to a steady increase in demand, which means higher prices.
3.HYPER-INFLATION : Hyperinflation is a term economists use to describe a period of extremely high inflation, which measures the rate of rising prices for goods and services. Typically, an economy has to see an inflation rate of greater than 50% for at least a month before economists use the hyperinflation level.
WAYS THAT CAN PREVENT THE EFFECT OF INFLATION & HOW RI PROFIT FROM INFLATION
1.INVEST IN STOCKS : People should invest in stock for long-term periods so that the effect of inflation can be normalized. Some of the best stocks to own during inflation would be in companies that can increase their prices naturally during inflationary periods. The prices of these items tend to go up as opposed to, for example, the price of a computer, which is subject to manufacturer and distributor price adjustments.
2.INVEST IN GOLD : Gold investments are the safest investment because with time gold rate also increases with the increased rate of inflation. That's why generally people are interested in investing in gold that can help in long- run and they can easily overcome the rate of inflation.
3.INVEST IN REAL-ESTATE : Investing in real estate or property is probably the best option to normalize the rate of inflation as with time the rate of property will also hike, generally because of the development of the surrounding. So investing in property can be a great approach to overcome the rate of inflation.
INFLATION RATE IN INDIA
The government has mandated the central bank to keep the inflation at 4 percent (+/- 2 percent). The annual CPI inflation was 4.48 percent in October 2021 and 6.93 percent in November 2020. It had eased from 5.3 percent in August to 4.35 percent in September and then moved up to 4.48
The retail inflation rate in June was 1.54 percent, lowest in last 18 years.
The lowest inflation rate, technically deflation, was recorded in May 1976 at (-)11.31 percent
On the other hand, highest inflation rate observed was 34.68 percent in September 1974.
OUR FINAL CONCLUSION
Inflation isn't always bad news. A little bit is actually quite healthy for an economy.But even when their wages are rising, higher inflation makes it harder for consumers to tell if a particular good is getting more expensive relative to other goods, or just in line with the average price increase.
Happy Learning
Team, The Successlogy
1 Comments
Informative
ReplyDelete