Inflation- review and explanation in depth

credit: TheEconomicTimes

Starting with an example- If I would have given you guys a note of rupees 100 in the year 1960 and you stored that money for 60 years with yourself then the actual value of that 100 rupee note will convert into 1 rupee in present this is the miracle of inflation, this is how the value of money declines due to the change of time.

is inflation bad, why does inflation occur and what are the effects of inflation on economy and employment that I will explain in this article-

why do inflation happens?

so the first question in your mind will be why do inflation happens is there someone in the government who makes it happen, no not at all. Actually there are 4 major reasons for the inflation-

1) Economic Growth- if the economy of a country is in a good state and each and every consumer in the country is having a good amount of money to buy maximum commodities so then companies will increase the prices more to generate maximum profits then before and this will lead to inflation and this type of inflation is known as demand pull inflation

2) Increase in the price of raw material- if due to any bad weather the price of crops and vegetables increases or due to any new law or tax the government increases the price of any raw material then the companies those who use these raw material to make there product will also increase the price of there product to stay in profits and then this will lead to inflation and this type of inflation is known as cost pull inflation

3) Increase in employees salaries- when companies increase the salary of there employees then to remain in profits they increase the price of there products which leads to inflation and this type of inflation is known as wage push inflation.

4) Currency Depreciation- this type of inflation happens when the govt starts printing more and more currency notes then allowed then this can also lead to hyper inflation which already happened in Zimbabwe and Venezuela.

During 2016-19 the inflation rate in Venezuela was more then 50,000,000% and if talk of Zimbabwe during 2008 inflation crisis the Zimbabwe started printing notes of 1 million dollar, 1 billion dollar and even 1 trillion dollar and the value of that 1 trillion dollar was only 1 US dollar

credit: cnn

Present Day Inflation

At present day the inflation in maximum countries is going downwards because of the lockdowns announced in most of the countries, People are not going out of there houses to buy goods they are not travelling much the businesses are closed the demand is therefore gone down and to counter this problem some of the countries have decided to give money to the people for free and to start a universal basic income. What do you think about it guys will this really help us to counter the problem?

Is Inflation Needed?

what if readers there is no inflation or a constant 0% inflation you must be thinking that it will be great because if there will be no inflation then the price of goods will never increase the value of money will never fall but no this is not just the case if you remember the reasons of inflation then you will come to know that if there will be no inflation then there will be no increase in salaries ever and also if there will be a deflation then the price of goods will fall every year so the customers will spend less and will save more by this the businesses will go in loss the employees will loss there jobs which ultimately will lead to unemployment and this will actually happen as shown in the Phillips curve shown below-

credit: economic help

there is an inverse relation between unemployment and inflation but this graph is not applicable in some cases like in hyper inflation like in Venezuela it does not mean that there is hundred percent employment and zero percent unemployment, because there are some more political factors included in there case but in general this graph is applicable in most of the cases.

What Is The Best Level Of Inflation?

So the question arises that if more inflation is not good and less inflation is again a big problem then what should be the optimum level of inflation which should be followed?

For developed countries the decided level of inflation is 2% and for India it is in between 2-6% by this average level of inflation the prices remain stable and also unemployment rate remains in control

How Can Government Control Inflation?

Mainly the central bank of any country is supposed to control the inflation rate and in India's case the RBI is supposed to do that by increasing and decreasing there interest rates and also there are some more ways like printing more currency notes, by increasing the taxes which can decrease inflation or by controlling the spending's of government

Inflation VS Recession

Till now I think you know that the inflation is directly proportional to economic growth but this again not always the case sometimes there is a recession in a country but the inflation keeps on increasing as shown belowcredit: businesstopia

and this is known as stagflation and as I told you before about the cost pull inflation factor, in this the cost of raw material increases the inflation increases but the economic growth goes down continuously but still there are some exception in which there is deflation+economic growth in a country and this has actually happened in America during 1870-90 during that period the price of products were continuously falling but there was a growth in economy as there were several factors for this like the productivity was increasing technological growth was there.

Consequences Of Inflation

Even if Inflation is important for the country but on individual basis it is having a bad impact because if your saved money will always loss the value time to time and that is why people rather then hiding the money invests it in gold, real estate and Crypto currency and also now after supreme courts judgement bitcoins are again legal in the nation so you can freely invest in it.

thank you