Inflation.

Inflation - Money Matters.

The word Inflation is used in economics to describe rising prices of commodities of all kinds in a particular country. Inflation is a complex subject to study because its complexities are hidden in many folds of economy which creeps into the mainstream market and slows it down by limiting the purchasing power of people. People's purchasing power is with the money they own. What inflation does to the economy is it rises the prevailing prices of goods and commodities to a level above a reasonable limit and makes them unaffordable.

The Reasons for Inflation.

Inflation is caused due to a number of reasons. An economy works like waves in the sea. It goes up and down with regular frequency. Prices of products change with time. It may go up or come down when its contributing factors change course and this phenomenon is seen everywhere. Inflation too has highs and lows and it keeps on switching between them.

The main reasons for inflation are:

(1) Sudden spurt in demand: This is one among the reasons, but its contribution to inflation becomes evident only if the demand is on a large scale and exceeds supply. We all know that when supply is low and demand is more, the prices are likely to rise. This is not limited to few commodities or services alone, because this is the general rule of economics. There are exceptions for this rule though. High demand may not always lead to inflation, because other factors too have a role in it.

(2) Increase in fuel prices: Fuel is basic for everybody and it is needed for growth of the economy and it is costly. Any rise in the price of fuel is definitely going to contribute to inflation. The increase in fuel price rises transportation costs. Costly transportation has adverse effects on trade and commerce. It brings conditions similar to inflation. As the demand for energy rises, the cost of fuel rises as well. The price of a cylinder of cooking gas for domestic use weighing 14.5 kg doubled in India within a couple of years. Petrol and diesel prices are frequently being updated with an upgrade. Harnessing solar power is costly too.

(3) Increased import costs: When import cost rises, the people who use imported products have to pay more. When a country is dependent on imports of essential goods, its citizens have to face the wrath of inflation whenever the price rises due to costly imports.

(4) Increase in the prices of raw materials: When raw materials become expensive, the finished goods become costly as well. This may not bring inflation as such, but may influence it if many industries use those raw materials.

(5) Taxes: Taxes too contribute to inflation, particularly when taxes on fuel, food, transportation and medicines are increased.

When Inflation becomes Painful.

Inflation could become painful to people. It is very much a troublesome enemy, but since everyone faces it, it often goes unnoticed by many. Inflation affects the poor badly. It snatches away the little bit of money the poor have and make them suffer for longer length of time. Unemployment is yet another troubling factor which makes inflation unbearable. Unemployment stops income which even in normal times hurts and its impact during inflation is more severe. The other dreadful factor is debt. Uncleared debts during inflation is indeed stressful because the debtor gets squeezed between his necessities and obligations.

High Retail Price.

Prices may or may not change during inflation. The price of a product or service is determined by the company or the manufacturer who makes it or provides it to the customer. The retail price has a limit which is called the maximum retail price (MRP) and it includes all applicable taxes. The customer does not have to pay more than the MRP. However, the company or the service provider has a right to change the MRP. Usually, no company would decrease the MRP and the only change seen is an increase. Companies would prefer to provide discounts for their products rather than reduce the MRP. The company may increase the MRP to rise profits or it will give discounts to please customers.

MRP and Inflation.

While Inflation means higher prices of goods and services, the high price of a product may not necessarily be due to inflation. To give an example, a particular product may have a high retail price set by the manufacturer. The high price of a product usually suggests that the product is of a high quality or has some features which are worth the price. The manufacturer has the right to set the price which could be higher than similar products available in the market, but this 'high price' does not indicate inflation.

There are many products with high price. A smartphone with 8GB RAM and 126 GB internal storage and 64 mp camera will be priced higher than a phone with 4GB RAM and 64 GB internal storage and 25 mp camera. This is logical because of its specifications and so its price is not due to inflation.

Some commodities and services have variations in price due to its specialities or characteristics. Example: a flight ticket is expensive than a train ticket. An aeroplane and a train do the same thing in effect (they take people to their destination which usually happens to be another city) but they do it in different ways which makes the difference in their prices. This again, is not inflation.

Prices are also time centric and they change as years pass by. You cannot buy anything today for a price which was there 20 or 30 years back. In 1980's, a litre of milk costed less than Rupees 2 in most Indian cities. By 2022, even half a litre milk cost around Rupees 22. The increase in price is not limited to milk: everything that is available in the market today is priced many times higher than those days. This is the general rise in prices which happens gradually as economies advance with time. This phenomenon is slow and is due to the periodic inflation which infuses slight rise in prices, which gradually gets accepted as the current market price. Once a price gets accepted as the current price, it is no longer regarded as an inflation.

The Ever Changing Market Price.

Market Price is the prevailing price of a product in the marketplace which also includes variations due to competition. This is interesting because by including competition, the market price seldom remains the same. To give an example, consider any product which is available in the market right now and compare it with similar or same product of a different brand. The difference in price is obvious because the products are made by different entities. However, market price could also change even if there is no competition. You will see some variations in price of a single product or service at various intervals.

The market price has two limits: a lower and an upper price limit. In every economy, the market price swings between these two limits. When the upper limit is crossed and remains unchanged for some months, that particular product becomes more expensive. When essential goods get into this stage, the inflation begins.

The Dangers of Inflation.

Inflation is dangerous because it can cause harm to the economy. Inflation acts like hypertension or high blood pressure. High blood pressure causes harm to the human body if it remains untreated for too long; it affects vital organs of the body. It affects the heart, the kidneys, the eyes, the brain and the blood vessels and renders them incapable of doing their functions well. Although a person suffering from hypertension may seem normal and healthy in appearance, his organs get affected over a period of time if it is not controlled.

Inflation acts much the same way. It causes harm to the economy slowly. While the economy might seem to be thriving because of the costly retail transactions, it slowly degrades the financial ecosystem of the affected country. Inflation could contribute to unemployment and thereby increase poverty. It can ruin the public healthcare system by increasing cost of medicines and medical services. It can erode the financial setup of a country and degrade its quality.

Governing Inflation.

Money is governed by the government of the country and by its Central Bank or the Reserve Bank. The Reserve Bank controls inflation and its bad effects on the economy. When inflation infests a country, its incumbent government and the central bank has a huge responsibility to stabilise its massive effects on the economy. They do everything they can to counter the ill-effects of inflation. It is true that the economic policies brought by the government influences growth and brings prosperity to people, it may not always be successful in controlling counter trends like inflation. Impediments often come in the way. High inflation robs the government's reputation.

Every country faces inflation. It cannot be kept controlled at all times. In fact, inflation cannot be governed or kept under control by any organisation or the government. Governing inflation is not easy. Had it been so easy, there would not be any problem of inflation at all.

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The previous post was: The savings bank account.

The next post is: Donations.

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