What is Inflation: Inflation is one of the most debated topics in current affairs owing to its direct impression on the monetary policies of the countries and day to day life of common man. In economical terms, Inflation is known as the sustaining increase in price of various utility goods and services over a particular span of time. With increase in inflation, the value of currency unit decreases remarkably which implies less goods or services can be purchased with specific amount of money.
Inflation affects the socio-economic condition of the world significantly. Inflation seems to affect any common man in several tangible ways.Every time you visit the grocery store or buy gasoline for your car, you see the price of the product has gone up slightly. As a matter of fact, the impacts of inflation do not become visible overnight or even in a month. However if you look back a year or more, you might be astonished to see the ever increasing rate of inflation.
The most clear impression of inflation is visible in interest rates and monetary investments. With the rise in inflation, interest rate on fixed term investments seems to rise and as a result the prices of bonds fall. For example, if the interest of a bond is 5% and the rate of inflation is 2%, the actual interest comes down to 3%. Thus the investors’ earning value decreases wherein the cost of living increasing.
Causes of inflation in India:
There could be several causes behind increase in inflation which are as follows:
- Pushing up the cost might cause inflation. Due to increase in cost of labor, interest rates and import prices, the extra cost is passed on to the consumers. This causes increase in price of goods and thus causes taxation on the consumers.
- When the demand of various products surpasses the supply, inflation is observed. The price of the products goes up unusually which results in inflation. In India, food inflation experienced a huge rise recently wherein price of certain food items like onions went way up the reach of common people.
- Unemployment can also be a cause of inflation. The unemployed group is considered reserve labor which causes shortage of workers and cause inflation of wages.
Effects of Inflation in India :
There are mostly negative effects of inflation as discussed below:
- Increase in price of commodities thus problems in your daily living.
- Hoarding (wherein people tend to purchase excess products before the value of money decreases further and it results in the shortage of hoarded products)
- Inflation increases uncertainty and risks in business
- People dependent on fixed income investments suffer as the value of money decreases
- Creditors suffer loss due to decrease in value of money
- Calculating and making profits become difficult with the inflation taking it to the opposite direction
- The amount of national savings is decreased significantly since looking at the devaluation of money people choose to spend it in other ways.
- Prices of imported goods increases thus lowering the international purchase power
- Borrowers on fixed rate of interest scheme can continue paying same money even if there is inflation.
- According to several economists, a slow and moderate rate of inflation might help fight the severe economic slowdown.
How to survive inflation? To deal with inflation, the consumers must act smart when it comes to investments. If you are earning 15% interest on a fixed investment and the rate of inflation is 20%, you are actually loosing 5%. So be smart about the investments. If you intend to invest in bonds, be careful since inflation might cause the bond prices fall in the long run. Fixing the variable mortgages is always a secured way to deal with inflation. Investment in durable products like gold or real estate can be profitable. Keep the utility expenditure moderate and trim down the expenses on movies and fine dining. Now this is how you can deal with inflation individually; however it is greatly dependant on the government policies in India whether the long term negative impacts of inflation can be minimized or not.