Have you ever wondered why the price of your notebooks are increasing year on year? Or why you need to pay more for friendship bands than last year? The answer to this is Inflation.
Inflation is responsible for the rise of general level of the price of everything, not just consumer items. To put it to simply, the power of purchasing with the same 100-rupee note is decreasing because of inflation.
What is Inflation?
Inflation is a long term rise in the prices of goods and services caused by the devaluation of currency. The value of money is determined by the amount of currency that is in circulation and the public’s perception of the value of that money.
How does Inflation affect us?
The most immediate effects of inflation are decreased purchasing power of a currency, which means you cannot buy the same amount of money as you could buy a year ago or before inflation. This is especially hard on people with limited incomes and those that are retired with fixed incomes, because their money buys a little less each year.
The after-effect of inflation is that people buy less due to the rise in prices. As a result, factories start to produce less. Since factories now make less money,they need to lay off the workers and the staff due to insufficient work, which leads to unemployment and poverty.
Why does inflation occur?
One reason is the mismatch in the demand and supply situation. When people have plenty of money, they want to spend it to acquire goods and services. This creates a demand on goods and services that is more than the average need.
For example, A store has a supply of 100 computers for sale. The price is set at ‘what the market will stand‘ or in other words what a buyer is willing to pay. If the price was Rs. 5000 and only 80 people wanted to buy a computer, then the price would be classified as too high since 20 computers would remain unsold. The price would this have to be dropped to encourage other buyers and when new stocks arrive , the price would be adjusted accordingly. If all the 100 computers were sold at the original price, then the price is right. However, if people had lots of spare cash and the demand was higher than supply, say 120 people wanted 100 computers, then the store could increase the price would have risen by 10%. If the whole market was aware of the excessive money available, then all prices would rise for goods and services, fuel, food and houses. If the riseis uniform, one would say the rate of inflation is 10%. This is how inflation occurs.
Government try to control inflation by increasing interest rates. This limits the money supply, increases the cost of borrowing and manufacturing and as people have less to spend, it encourages smaller price rises. Some rises in costs are inevitable as wages costs increase annually by incremental rises across the board, but generally they are in line with inflation.
How does one fight inflation?
- The best way is to start saving money early on in life.
- Be a careful and smart buyer rather than being an impulse buyer.
- When you start investing, choose the right investments that offer you a percentage return that is higher than the rate of inflation.
- Keep in mind the following formula before you invest :
Actual return on investment – rate of inflation.
– JANE SHA