Inflation

Inflation refers to the rise in the prices of goods and services like food, clothing, petrol, housing, transport, etc. over a period of time. When there is rise in Inflation rate, purchasing power of money decreases,i.e. same amount of goods will be purchased in higher prices. When there is fall in the price index of the items, the purchasing power of the money increases this is called deflation. A certain level of inflation is required in the economy to promote expenditure and to demotivate hoarding money through savings. The optimum level of inflation will nurture economic growth.

Types of Inflation :

1.Demand Pull Inflation : An increase in the supply of money and credits stimulates the overall demand for goods and services. The demand increases more rapidly than the economic’s production capacity. This increasing demand creates demand-supply gap as there is not the supply of products as per demand, leading increase in prices.
2.Cost Push Inflation : Demands of the  goods and services remains constant but there is increase in their prices. There are several factors affecting this pricing of goods like depletion of resources,  monopoly over market , government taxation, change in exchange rate,etc. For example, sudden increase in prices of tomatoes, onions etc. due to poor harvest, crude oil fluctuations,etc.
3.Built-in Inflation : It evolves from the past events and continues to affect the economy of the country. We often get to see blue collar worker’s protest for higher pay scales.

Causes of Inflation :

• Increase in supply of money in the market beyond a certain limit reduces the value of currency.
• Increase in prices of imported products.
• High demand and low supply of products leads to hike in price.
• People with more money tends to spend more causing increase in demands.
• Low growth of agricultural products leads to decrease in agricultural prices causes rise in price of goods through reduced supply.

Impact of Inflation :

• It causes loss of purchasing power of the money. It impacts the general cost of living as now people have the constant wages but have to buy less amount of daily products due to hike in price which ultimately leads to deceleration of economic growth.
• It reduces savings as substantial amount of income is spent on daily consumables due to increased costs.
• It also leads to consumers hoarding goods in fear of further increase in prices leading more shortage of supply and exponential increase in price.