We all have heard that nowadays things are too expensive grocery prices have skyrocketed and this is difficult to manage expenses in respective income, but all these prices aren’t increasing out of nowhere but there are reasons behind them and a proper method to identify the rising prices. So, when the price of commodities rises significantly and people find it difficult to fulfill their essential needs of living, we call it inflation. The inflation rate is measured by the Consumer Price Index (CPI). introduced by the Labor Bureau of Statistics (LBS). It includes around 80,000 goods and commodities and puts them in one basket. like; wheat, rice pulses, medics, meat, healthcare, fuel, education, etc., and summing up their prices in a consolidated manner, this calculation has taken place annually and compared to the preceding year in terms of percentage. resulting in the identification of changes in the rate of prices. If you heard the inflation has increased by 5% then it is the average increment in this bundle of products’ price. If the rate increases, it is considered as rising inflation and vice versa. The insignificant changes in the rate aren’t the problem but when the rate increases significantly, it is an alarming situation for the respective country to fix its unbalanced economy.
The other method utilized by the government to measure inflation is Personal Consumption Expenditure (PCE). This measure is more like the CPI. But the key difference is it does measure the price from the supply side. It tracks businesses, unlike consumers. This method is more accurate in that it gives a clear look at the root cause of the problem. By tracking the businesses government finds it more convenient to figure out the increasing cost of doing business and can take effective measures to overcome the problem.
Inflation is the most common term utilized by people nowadays, in every part of the world even 1st world countries are majorly hit by it. Inflation has disastrous effects on the lives of the common man. There are several social classes in which we are divided as a society and those are:
- Higher class
- Middle class
- Lower class
Among all these three classes the most affected class is the middle and lower classes which got hit badly by inflation, a lower class can be pushed below the poverty line by disastrous economic condition, if we look at the business side, the cost of doing business skyrocketed which make it difficult for Small and Medium Enterprises (SMEs.) To survive.
To understand inflation in-depth, we need to find out the causes of inflation, which are:
EXCESSIVE DEMAND
The conventional world economic system is highly fragile and maintaining a balance in this system is an extremely sensitive job, which most governments fail to do. When the economies are on the right track and everyone earning an ample amount of money and fulfilling their needs and wants, the government too feels confident because they’re receiving a lot of tax money and the Gross Domestic Product (GDP) continues to grow, but as people’s income increases simultaneously their spending increase. The demand for commodities rises as compared to supply, which is after all limited, such a situation causes an increase in the prices of products and services.
To control the rising prices, the government uses contractionary monetary and fiscal policy to hold the money supply in the market, this policy is effective on the consumer end but disastrous for the businesses. Increased interest rates cause a negative impact on businesses which eventually has an inverse impact on the commodity supply and it adds fuel to the fire, resulting in “hyperinflation”.
CURRENCY DEVALUATION
The currencies of the whole world are based on the US dollar standard. This means almost every country in the world keeps its National reserves in US dollars and their currency value depends on the exchange value of reserve currency. Moreover, the majority of countries trade their goods and services with other countries in exchange for US dollars, the more they export, their reserves increase and the local currency remains stable. If the respective country starts to import more than it exports, it will begin to lose its reserves and exchange its currency against the US dollar for import payments, which ultimately raises the price of the Dollar. In this way, the local currency suffers devaluation.
As currency got devalued, the cost of doing business skyrocketed which results in inflation
SPECULATED INFLATION
The above-mentioned reasons are fundamental and highly factual but this reason is just a speculation. Yes, as we all know, rumors can drive markets. We have witnessed this multiple times in the stock exchange, once the rumors circulate people start to panic about buying or selling which leads to an extreme increase or decrease in the price of shares. Likewise, sometimes the rumors about the recession spread and cause the Butterfly effect, people start buying more and more so they keep the stock that will be helpful for them in the recession period, resulting in excessive demand which causes a hike in commodities and service price ends up in hyperinflation.
CONCLUSION
Inflation is a real problem nowadays, firstly it hit hard to poor countries but now it is a major problem for rich countries with gigantic economic sizes. This economic problem is like a pain that has no cure, and after every few years, it brings recession. To prevent this situation, the government needs to stop balancing economies on a speculated basis and focus on increasing productivity which fulfills the needs of the people and maintains the economic health of the country.
Thanks!
