INFLATION: The Truth Behind It

Inflation

Suppose you have had a hundred dollar bill in back 1980 and you decided to keep that bill till this date, then what would happen? Would that 100 dollars bill give you the same value of money till this date? Yes, the answer is NO. so, this theory is called Inflation AKA price hike.

What is inflation?

Inflation is quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over the period of time.

Why inflation happens?

There are 4 main reasons for inflation which we are going to disclose.

1.    Economy growth: 

      

          If the economy growth of a state increases the inflation rate increases. When there’s more money in the hand of the people, they can spend it on different items. That means the demand of the goods will be increasing. And when the demand is increased the companies will have the opportunity to increase their product’s rate to gain more profit. And that is how inflation occurs.

2.             Increase in prices of raw materials: 

      

           If the prices of the raw materials increases for any reasons such as, the government imposes taxes or for bad weather or any other reason, the companies which use these raw materials have to increase their product value. This inflation is called the cost push inflation.

3.             Increase in the salaries of the citizens: 

         

        When the companies or the governments increases the salary rate of the citizens, then they have to increase the price of their products to be able to still make profits. It’s like a never ending circle. And this is called the wage push inflation. There are other facts as well. If the unemployment level are at very low levels in a country, then it is extremely difficult for the companies to replace their employees. And if they aren’t replaced, then their salaries would have to be raised. Which will automatically trigger the inflation.

4.        Currency depreciation: 

 

          If the government prints more notes, it can cause inflation. If the quantity of currency is more than the estate of a state then that leads to inflation. Sometimes it triggers hyperinflation. Which happened in Zimbabwe in 2008.

 Inflation in present day:

   As of the world is suffering from epidemic covid-19, the inflation rate is decreasing day by day. It is because of the shrinking demand in the wake of the lock-downs that have been imposed around the world. As people are staying home nowadays they don’t have enough money to consume products, they are travelling less. So, there has been a decline in overall demand. As the demand is decreasing, the inflation is also decreasing.

Is inflation necessary?

Now some people may think that inflation isn’t necessary. But the truth is, it is necessary. Let just think about an inflation free state. What would happen? If there is no inflation the companies or the governments will ceases to increase the salary of the employees. As the salaries never go down, in general, inflation always stays in the positive. People will nor spend their money to buy new products. As a result companies will face losses and they will have to reduce their employees. Which will cause unemployment problems.

What should be the inflation rate?

Now the question arises that, what should be the inflation rate of a country? It is said that the ideal inflation rate of a developed nation should be around 2% and for the developing country this rate should be around 4% (± 2%).

 

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