Inflation is basically a persistent increase in average prices of goods and services over a period of time.This hike in price can be of daily used goods,commercial or industrial goods.If we try to understand it in simple language,it relates to the decrease in value of money year after year.The value of current 100 Rupees is equal to Rupee 1 of 1958.To be more simpler,if a product’s present price is 100 rupees,in 1958 the same product could be bought for 1 rupee.The word inflation comes from the word “Inflate” which means to increase.So as the name suggests,It is a hike in price of goods and services available in the market.
REASONS OR TYPES OF INFLATION
1)COST PUSH INFLATION-A basic or general reason behind increase in price of any commodity can be the manufacture himself.Such a decision of manufacture can be driven by reasons like increased prices of raw materials,increased transport costs,increased taxes by the government or any other situation where the manufacturer raises the price of the product to maintain his profit margins.Such an inflation is introduced due to increased manufacturing cost of a product,hence known as Cost Push Inflation.
2)DEMAND PULL INFLATION–Every economy tends to follow a cycle of boom and bust.Economic boom is a condition where there is a rapid increase in GDP,lower unemployment and rising product prices.Opposite to economic boom,economic bust is a situation which results in higher unemployment,less opportunities and lower income.As we here,are talking about inflation,during economic boom there is increase in GDP,that means more money in market,more money in people’s hand and less unemployment.Purchasing power of people increase,which means people purchase more which leads to more demand.More demand of the product encourages the manufacturer to increase the prices and ultimately inflation occurs.As such an inflation is raised due to demand ,it is called pull inflation.
3)WAGE PUSH INFLATION-As the government or any private company increases the worker’s salary,it is difficult for them to maintain their profit margin.Hence,they as a result increase the product prices or the services they provide,in order to remain in profit side.Such a inflation is known as wage push inflation.
4)HYPERINFLATION-Currency depreciation is a condition where the value of money goes very much down as compared to other foreign country’s currency.This basically happens when there is more liquidity in market that means more money and if not controlled may lead to a situation called Hyperinflation where inflation rates rapidly increase by an accelerating pace.Zimbabwe in Feb 2007,started suffering from hyperinflation,where the government of Zimbabwe has to print 1 trillion dollar note which was equal of 1 US dollar.This is the level to which money can loose its value due to inflation.Main reasons behind Hyperinflation are currency depreciation and demand pull inflation.Money looses its value by time,so it is important for people to invest money.This is the reason people like to buy gold and invest in infrastructure.Money’s value devaluates due to inflation but on the contrary,gold and infrastructure prices keep on increasing by the time.
WHAT IS THE OPTIMUM LEVEL OF INFLATION
A higher inflation leads to hyperinflation and a lower level of it leads to deflation,both of these conditions not good for the economy.So,what should be it’s ideal rate for the country’s economy.For developed countries,the rate should be 2%.But for Indian economy it should be 4% with 2% of plus or minus that means within 2%-6%.To control inflation in market,RBI keeps on adjusting its monetory policies through which liquidity can be controlled in the market.Its Optimum level serves us a balanced prices of the goods and services,not too high,not too low and the unemployment is also minimum.
Knowing and understanding the reasons till now,it seems like 0% inflation must be very good,where the prices of the products will be low and easier to buy.But in reality,if we go deeper and understand it’s reasons,it will itself clear whether 0% inflation is good or not.
Understanding the wage push inflation,if there will be 0% inflation,the wages of people will remain constant.There will be no increase in wages,hence 0% inflation is not good.Also,if there will be 0%,deflation will occur which is opposite of inflation where product prices decrease year by year and more unemployment is there in the market.During deflation,as product prices decrease year by year,people try to save money so as to purchase for the next year as prices will be decreased more.For eg-A person decides to buy a car,but knows due to deflation,the car prices must go down by the time,hence cancels down the car buying and saves money which continues year by year.Due to this demand decreases,companies loose their profits,remove there employees and ultimately unemployment rises.Deflation basically reduces spending of people as the product available today,will be available at much cheaper prices a year after due to deflation.
CONTROLLING AND MEASURING INFLATION
Ministry of statistics and program implementation measures the current rate of inflation in the economy.Reserve bank of India or central bank of India is responsible for controlling the rate of inflation in the economy through adjusting the interest rates.There are basically 2 major indexes through which inflation is measured.
1)WHOLESALE PRICE INDEX-It is a index which measures the inflation through the change in average price of the wholesale products sold by the wholesaler.
2)CONSUMER PRICE INDEX-Consumer price index measures the inflation by change in average price over the time of the products and services used by the households.
Generally,inflation and unemployment are inversely proportional to each other,which means if inflation rises unemployment decreases and if inflation decreases unemployment increases.A certain level of inflation is necessary in market to encourage production,employment,demand and other economical aspects in the market.