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.
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.
(a) Export-boom Inflation
