Inflation – by Rahul Singhai

In economics, the general definition of inflation is sustained increase in the general price level of goods and services in an economy over a period of time. Now, when we talk about this then the general population gets scared of increasing price levels of goods and services. But instead of scaring, we need to understand what are the forces behind this hike first.

Let understand inflation more clearly. Basically it is measured as an annual percentage increase. The value of rupee doesn’t stay constant when there is inflation. The value of a rupee is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When price level goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 5% annually, then theoretically Rs.60 kg of rice will cost Rs60.05 in a year.

There are several variations on inflation:

• Deflation is when the price level is falling. This is opposite of inflation.
• Hyperinflation is unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation’s monetary system.
• Stagflation is the combination of high unemployment and economic stagnation with inflation.

Basically no one is in accord while conversing upon forces behind the boom in prices, but at least two theories are generally accepted:

• Demand-Pull Inflation – If demand is growing faster than supply, prices will increase. This generally happens in growing economies.
• Cost-Push Inflation – When companies’ costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.

Many times people ignore the fact that wages also rising now days. The question shouldn’t be whether inflation is rising, but whether it’s rising at a quicker pace than our wages.

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