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What is Inflation? Types of Inflation? Inflation Impacts? Solution?


Very often you must have heard the word "Inflation", every time you hear some CRR, Rates, Price High, Credit Policy and more, and don't understand what exactly it is.

I thought of writing an article on it with suitable examples in as simple language as possible, as the blog itself is called Layman blog, so that one can understand the meaning of these words and relation between them.
Mainly question raised on inflation is, what it is? why? types? Impact or effects? Does it affects me? Solution?

Here I put these question one by one and explain it in detailed.

The First Question:
What is Inflation?
Simple meaning of inflation, the present value of the currency is going low.

What leads to Inflation?
Mismatch of demand and supply leads to Inflation, where the purchasing power goes down in Inflation.  Inflation is a rise in the general price level of goods and services.


Inflation is not the rise of prices, but the excess money printing and expansion of the money supply (Huge example is Zimbabwe, where the inflation is around in thousands).
For example, earlier let say a product can be bought at Rs.10, but now the same product cost you Rs.50. An increase of 400%, If you ask any one why this happened, the answer will be simple the cost of production has gone up so the end value.
The reason is right, but the perspective is wrong, the price has not gone up but the value of the money has gone down.

Now a question may arise, what is relation between demand, supply, cost going up?
People has excess of money holding with them, which forces them to spend it, by which the demand is going up for the respective product but the supply is same/constant, simple rule applies here, demand is high, supply not reaching demand, price is high.

Now you may ask, why do one spend when the rates are already high?
The Answer is simple, ask your mother. She says, the prices may go even more up tomorrow, so let me buy and store the stock today itself.
An Example of inflation is the recent times is the oil prices touching the sky,
where oil is an essential need of any industry in the country so the demand exceeded the supply and inflation in India touched double digit.

What are the types of inflation?
Inflation are of two types majorly, CostPush Inflation and Demand Pull Inflation.
In the former the prices goes up because the cost of production went up and in the later the demand exceeds supply and leads to excess in price of the available output of goods.

What is skewflation/ Skew-flation/Skew Inflation?
The economic survey as termed a new word called skew inflation which was termed after observing Inflation which was somewhat unusual, since there was an huge inflation in Food Sector where the Non-food sector was constant. 
As some sector was facing an huge inflation and few other sectors faced were no changes or even deflation(opposite of inflation) so they termed its as “skewflation”.

How Changes in Credit Policy rate/ Bank rates affects Inflation?
Inflation can be very much directly controlled by the medium called Banks/Financial Institution.  A direct impact can be reaped through it.  So, that's the reason why the RBI intervene and control the inflation in the way of changes in the policy rates.

Not let me be clear with it how this works, talking an recent example of changes of CRR, Repo rate, Reverse repo rate. These rate has been increased of .25 basic points. What happens when this changes took place is? (Check out the Present Credit Policy Rates).

If the interest rate are low, there is the higher liquidity of cash in the market so the purchasing power of the people goes up, when these rate are increase in interest rates means lower liquidity in market., which means there is lower availability of cash to change hands. Due to this credit crunch there is an direct impact takes place in investments as well as in all sectors.

If the interest rate goes up, people start making saving so ultimately the inflation goes down.

How inflation Impacts?
These are the few impacts of Inflation:

It slow down the economic growth rate.
Prices goes up, that mean you pay more money for the same product which you got it lesser earlier. 
The standard of living declines. 
You got to save more to pay high expenses tomorrow, so your left with less income in hand.

Solution/Steps to control inflation?
Stop printing of excess money.
Increasing in credit policy rates.
Don't keep the cash in hand, Invest the money some where. Because it loses its value constantly.

What is the Present Inflation rate?
In 2009, the inflation rate stood at 11.49%, but gradually settled now at 9.90% in March 2010.

Very Important question, Is Inflation Good Or Bad?
When the government is trying to decrease the inflation rate at its best means the answer is the inflation is bad.
But I say Inflation is absolutely Good, why?
As I said inflation means excess of demand over supply, so if the demand is more and supply is low there will be an start of new player entry, again advantages of competitive rates, best quality, latest methods technology comes in, most importantly the Foreign Direct Investment(FDI) goes up.

But this all advantages can be gained only if the inflation is at 4%-5%.
Conclusion: "Low Inflation should be the key goal of Monetary policy of any country."

I hope I have written the article as simple as possible for better understanding.




27 comments:

  1. Thanks Minal and bikram for liking the article.

    Will make sure to publish more article as simple as possible for better understanding of the difficult topics.

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  2. thanks for the article

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  3. really gud one ...very helpful

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  4. really its simple and easy to understand...thanx

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  5. It's simple and easy to understand so good work .... and make some more blog on different economy key words it would we very helpful... thanxxx for this :D :D

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  6. Thanks for your wonderful feedback and I really appreciate for the input given. Will post more articles on economy too. Keep visiting the blog for the updates and do leave feedback.

    - RMI

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  7. Ah...finally understood the term clearly. Thanksss!

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  8. very helpful article

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  9. Great info on inflation buddy. Nice and clear. There are few spell check you need to do. Apart from that it's just a perfect article about inflation.

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  10. its really fantastic!!! tnx alot

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  11. atleast now i know something about inflation.. and also understand why government is pushing for FDI. But why do u think there are some hardliners opposing it?

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  12. @gomateshwar: thanks, will look into it.

    @fdi question?

    It more of dodge, there is always an unacceptable slogan heard from opposition. Indian consists close to 90% apprx(facts and figures) to unorganized sector in retail industry and there is a fear that, the entry of big players will lead to unemployment of existing small traders, which in fact will not. The relaxation will really have a very positive impact and improve the present scenario of business. Remember, India's inflation is not demand side inflation, its supply driven inflation, thus a proper distribution and delivery channel has to be created, for which the sector should be opened up at this point of time,(FYI: China opened its economy in 1980 itself)

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  13. Thanks for the article making easy understanding and what measures to be taken to control inflation in big countries such as India

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  14. awesome!!just what i was looking for..please write more articles like this..thank you ..

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  15. superb - thanks a ton :)

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  16. very well written
    clear approach

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  17. Nice article u have written .....carry on this process .....good luck

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  18. Very Nice :)

    and easy :)

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  19. It really helped my understanding about indian economy.
    Thanx for d post

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  20. it is simple &understandable

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