101: What is Inflation

What is Inflation?

Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time.

The cost of a cup of coffee increase over a period of time and so does the wage of the consumers to keep up with the lifestyle. While inflation is necessary for the economic growth of a country as experts suggest, inflation more than a certain rate can disrupt the economic scenario of a nation.

What causes inflation?

To dig deep and find out what actually causes inflation, we need to understand some basic things. In a developing nation, wages increase with the cost of commodities. The prices of services increase with time and the following reasons are responsible for that.

Demand-Pull

Demand-pull inflation occurs when the demand-supply is not in equilibrium. When the production of a good is unable to meet the demand of the good, the price of the good increases. This was recently seen during the COVID-19 pandemic where the prices of sanitary and medical supplies increased as the demand for these goods couldn’t be fulfilled by the current production rate. The demand-pull inflation can be resolved by increasing the production of the goods to meet the demand.

Cost-Push

Cost-push inflation is the result of the increment of the raw material’s cost. A cost of a homemade cookie is likely to increase with the increase of the cost of flour. It is basically a ripple effect since the cost of many goods may depend on one single commodity or goods. The prices of a lot of services may increase if the prices of electricity or crude oil increase.

Built-in

Inflation is fairly necessary for the development of a nation. Built-in inflation is a relative model between the prices of goods and the wages of the consumers. When the prices of the commodities in a nation increase, the wages of the people too are appreciated in order to meet the lifestyle standards of the people. Likewise when the wages of the people increases, the prices of the services too increase creating an economic balance. This spiral continues to contribute to the economic system.

How to calculate the inflation rate?

CPI Index Value

CPI stands for Consumer Price Index. The CPI is a measure that examines the weighted average of prices of a basket of goods and services which are of primary consumer needs. They include transportation, food, and medical care.

Is inflation good?

The increasing prices for basic commodities might not look the best. But inflation is good for the economic growth of a nation provided that it occurs at a controlled rate. People with assets like real estate, stocks and gold might benefit from inflation as now the value of their asset is set to hike. People with cash might face a backlog.

Hedging against inflation

Inflation is an ongoing phenomenon but that does not mean that all your money’s value is getting depreciated. You can simply use certain ledgers against inflation to keep the value of your money intact and not let inflation mess with it.

Mutual Funds

Mutual Funds are one of the famous investment plans that people choose and not only they are a ledger against inflation but also mutual funds under ELSS would help you save taxes. The average inflation rate in India was 6.2 in 2020 and the appreciation rate of the Quant Tax Plan (Under ELSS) was 116.23% in the meantime.

Stocks

Owning stocks is like owning a part of the company, literally. Stocks can be a great hedge against inflation only if you have good enough knowledge of where your money should go. Before you invest in stocks, you want to make yourself familiar with the mission and work of the company. Would the company grow in the coming years is the major question you may want to ask yourself. You can always rely on a financial adviser but invest all by yourself without having a broker. Apps like Groww and Upstox eliminate the broker enabling you to have transparency and freedom.

Gold or Digital Gold

Gold is indeed the oldest and strongest investment plan. The gold prices have increased by 55.1% in the last 5 years but the catch is the high GST and making charges. The overhead taxes may not be refunded at the time of reselling. These taxes might be avoided by shifting to digital gold. Digital gold can be bought over many platforms and you only need to pay the basic taxes and skip the making charges. The real gold might tarnish over time and the value might deplete, with digital gold you don’t need to worry about anything as the gold is stored in a safe vault.

Crypto

The trendy, new to the news cryptocurrency has emerged and proven to be an excellent ledger against inflation. The increase of value over the years is across the roof. An early investor in crypto opens his gateways to huge profits and also the volatility of the market. The market is unpredictable more than the stock market but the returns of the long-term investments are worth the risk.

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