Inflation is a basic term, which affects our economy on a major scale. Every branch of the economy and everyone related to it are affected by its rise and fall measured in parameters of ‘Rate’.
Do you know the cost of a movie ticket in the 1990s? It ranged from Rupee 0.90 to Rupee 2, that is it! The kids of this generation refuse to believe their grandparents when they are told so. On the contrary, a movie ticket in today’s time easily ranges from Rupees 250 ranging up to even Rupees 1500. This is what we call ‘INFLATION!’
Inflation refers to the increase in the price of commodities and services over a span of time. This phenomenon of inflation in the economy affects the common person and the government of the country. The larger hike in the inflation rate can often devalue the currency of the country and result in a recession.
WHAT IS INFLATION?
The term ‘Inflation’ is frequently heard from people when they talk about food items, oil, and fuel. This is because these items run the economy keeping the common people at stake. The people of the country are most affected by the rise and fall in the price of these commodities. For example, if the price of fuel goes from Rupees 72 per litre to Rupees 92 per liter, the input costs of businesses will escalate and the transportation cost will also swell for everyone.
This phenomenon may increase the price of other things in the economy in response and it becomes a cycle. This operational function of supply and demand for cash will devalue if the same phenomenon persists for a continuous period of time. This means the more cash the economy generates, it will relatively decrease the value of a single rupee, making the general price level to climb.
WHAT ARE THE CAUSES OF INFLATION?
Many different factors may be responsible for inflation. It depends on factors like the type of economy, the government in rule, the location of the country, etc. However, below mentioned are the factors, which are predominantly responsible for inflation in a country.
Monetary Rules and Regulations– When in countries where the central government rules the interest rates of goods and services, then the demand rates of commodities will either increase or decrease, thus, this may give rise to Inflation in its economy.
Supply inconsistency – When the growth in agriculture is hampered due to any reason, for instance; flood or drought or any climatic changes and the supply is stopped, then it may lead to lesser production of goods and services, which ultimately results in an effective rise of prices in the manufacturing of those products.
Unbalanced Demand– In simple terms, when there is a spike in demand for any good or service, then it may lead to inflation. It is like, unlimited money running after limited products. It is an obvious fact, where too much money is circulated in the market, the balance is important to be maintained otherwise it may lead to inflation.
Raw material price hike– As we all know, the raw materials, which are used in the manufacturing of a product, are not all developed in one country. Thus, if there is an increase in the price of the raw materials in their home countries, it will definitely increase the price of the final product manufactured from it.
These are some of the major causes of inflation, which were necessary to understand its basic concept. Now, with every cause comes to its effects! We will discuss the effects of inflation on common people, which is most important!
EFFECTS OF INFLATION ON CONSUMERS
Following are the major effects of inflation in a country on the common people:
High inflation in the economy can encourage employees in the country to demand a wage hike to support consumer prices. Inflation generates more opportunities for inflationary functions in the country.
During the inflation period, the manufacturers and the retailers initiate the practice of buying and holding the goods with themselves to create pseudo-scarcity, thus minimizing the supply, to inflate the price, in order to sell it to the public for the sake of profit.
Inflation can affect a major part of society as most of the people belong to a middle-class sector and below that. Poor people can hardly afford the goods and services at their current price; just imagine the reaction when they hear about inflation in the rates. This leads to massive revolts and demonstrations.
Lowering allocative efficiency–
Inflation leads to the loss of quality business investments and productive factors. Example- If we reduce inflation by 25 percent, the growth rate of the economy will increase by 1.0 percent. Thus, the public is in a constant dilemma of the continuously changing prices of their goodwill products.
‘The shoe-leather cost’–
High inflation in the economy leads to the opportunity of holding cash money, which simply leads to people holding on to their assets in the interest of paying accounts. However, cash is still the most common resource to carry out transactions. Thus, going to the bank to withdraw cash leads to wearing out. Hence, the ‘shoe-leather’ cost.
The above-mentioned points are some of the major effects of Inflation in an ideal economy. Many other effects are triggered due to the changes made because of these effects. Thus, causing the ‘branch effect’, which is ultimate because of a single issue of ‘inflation’.
Inflation can be a very complicated topic and very sensitive as well when talked about in public and the government. Everyone has his or her own opinion when it comes to the topic of inflation. In my opinion, after researching the topic, inflation is a ‘Necessary-Evil’ in the economy. It is important to have inflation in the country in order for it to grow its economy.
It is very important for the people of the country to understand that with the increasing rates of commodities, their wages or salaries are also increasing. Therefore, a modest rate of inflation is healthy for everyone in the country but as soon as the inflation rates spike rapidly, there is a problem for the market and its consumers. However, the problem arises when inflation rates increase faster than the rate of wages.