4 Ways of Inflation cause-effect Revelation | price fluctuation in the economy

Like everything in the universe is run by some magical (as some people believe that way, not all) powers, everything in the economy is run by the increased or decreased level of inflation.

When you were a teenager then you must be fond of some chocolates. Let’s assume your favorite chocolate was Cadbury dairy milk silk which used to cost one dollar in your teenage but now you’re grown up and enjoying your happy married life with your kids.

On one fine day, you thought of introducing your children to your teen age’s favorite Cadbury dairy milk silk. But it has been 15-20 years now since your last purchase of Cadbury dairy milk silk. So, when you go to purchase the chocolate you find it’s available at 10 dollars and not at one dollar as in your teenage.

Now you might be confused why this same chocolate is priced so much at this time and the reason for this is the rise in the prices of all the goods required for chocolates making and transportation prices. Some or all of them increase over the period of time which is called inflation in economics terms.

Now the obvious question in your mind will be what is inflation?

Inflation is an increase in the prices of all the goods(in general like bread to the car) some goods(in particular like fuel prices) around us means goods or services which we need or want in the day to day life. 

This rise is directly proportional to many simple factors but we have some factors in our wallet which is called money or currency. when any country calculates inflation for its economy it then, It is not the calculation of single goods or services but its collective price of all the goods and then their average price calculation.

The calculation is later on compared to last year’s inflation numbers to calculate the range of inflation for the economy. Sometimes inflation is compared with the base year of the economy because the year is decided by considering some factors like the normal flow of all the goods and services for that particular year.

In the rarest situations, there happens completely opposite of this, which means prices of everything fall and they fall to a very low value like your favorite chocolates are now at 25 cents which are just one-fourth of dollars. This exceptional condition is called deflation which is completely opposite to inflation.

What is the purchasing power of the Currency?

Before discussing more points about inflation it’s important to understand what is Purchasing power of currency because it’s the direct factor that affects inflation.

Purchasing power parity is the ability of a currency to purchase goods or services for a particular amount of money, and this Purchasing power parity’s of currency increases or decreases occurs because of some factors in the economy and that in turn affects Inflation.

Let’s again go towards your favorite Cadbury story. So in your teenage, you could purchase complete chocolate of Cadbury for one dollar but at your young age, you could buy only one-tenth part of the same chocolate for one dollar. As the price of complete chocolate is 10 dollars.

How purchasing power of the Currency affects consumers?

This means approximately one small bite only can be possibly bought from the same one dollars. This tells the Purchasing power of currency has decreased over time for particular goods for example chocolate in the 15-20 years.

So in a way, inflation is affecting all the factors around your daily needs and this is likely to affect your living style expenses.

This means if you want to enjoy your present level of lifestyle for longer tenure then you need to do expenses in that proportion only. Keeping in mind the increasing level of inflation. But this is not a good indication for the economic growth of the country. As everyone can’t adjust all their finances with the sudden increase in inflation.

A certain and constant level of inflation over the years is required for boosting the economy, as inflation mainly promotes or increases the value of purchasing power of money which is called expenditure.

With more and more expenditure the economy is going to reduce the savings culture. As people are saving less and spending more on all their needs. this boosts all the small, medium businesses in the economy.

As they get their product sold and they are able to get a good amount of money as returns from the present sale and for investing in business expansion. this results in the economy of all the businesses for the country grows.

How to measure inflation?

Every nation has some central banks like the federal reserve for the USA, Reserve bank for India, Reserve bank of Australia, etc. Who is responsible for all the smooth economic activities of the respective nations. these banks along with the ruling government of that country are the key makers in controlling and moderating the inflation change in the economy.

How inflation Occurs? Types of Inflation?

Inflation happens due to various social or economical conditions. Let’s understand one by one.

demand-pull inflation:

Imagine there’s Christmas next week and a new collection of Nike shoes is out. Which are promoted by Christopher Ronaldo for 100$. So many people are planning to give it to their loved ones but the product is just launched. Hence its production speed will be lesser. For analyzing the Market demand of they produced 5000 shoe pairs only in the first production lot but everyone loved it and so the demand is all of a sudden 8000 pairs.

but there’s acute supply as Christmas is just a day away and everyone wants the same thing only so in this condition sellers will sell the products to the buyers who can pay more than than the regular price(maybe double or triple the price) in the way the buyer’s will decrease and sales will continue to happen as well.

This condition is called demand-pull inflation in which some situations arise which creates an inflationary bubble and prices of particular products only arise.

cost-push inflation :

Now imagine if you want to buy a new cell phone but one part which is used in the batteries of your new cellphone is being costly for a couple of months. This has happened because of some international issues. But of course, you want to purchase the cellphone for all your needs, like for clicking photos and to check out new feeds in your favorite social media accounts or for checking your office mails and replying to them instantly.

In this condition, you will purchase the cell phone at any increased price, so this condition in which the price rise happens due to an increase in the production cost is called cost-push inflation and in the issues, all the raw material prices fluctuation is the main concern.

There are some other temporary issues that can affect inflation like government policy interventions to secure their regional market from international markets shocks for example international oil prices rise by gulf countries, wages hikes by government etc. But these are temporary reasons and can be sorted out with both the countries mutual trade treaties.

In this way we have leant all the important aspects around the infection, feel free to share your opinions for any economy related issues. We will we happy to help you out. Keep reading keep growing.

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