Inflation, in simple words can be defined as the general rise in the prices of goods and services in an economy.
As an economist rightly said, “Inflation occurs when the aggregate quantity of goods demanded at any particular price level is rising more quickly than the aggregate quantity of goods supplied at that price level.”
So, firstly the question arises as to why there is a rise in the prices of goods and services over a period of time? There are a few important factors triggering inflation such as production cost of goods, increase in demand of goods and services, government fiscal policy, etc. The economics is mostly engaged with the demand and supply of goods and services. Demand changes due to changes in rise/fall of prices of goods/services and supply changes based on its demand. Shortfall in supply of goods due to an increase in demand leads to rise in prices hence triggering inflation. With more cash in the bank accounts of consumers makes them find new reasons to buy goods.
To simplify even more, let’s take an example of a person named Bhuwan, Mr Bhuwan is a resident of India. He is a government employee. He has been working for six years. His net take-home monthly salary is INR 45,000. Since he has been working for quite sometime, he was wise enough to save some portion of his income. One fine day, he decides to save his money in the form of fixed deposit in a reputed bank to earn good interest in return and deposits INR 5,00,000 as fixed deposit @ 7% interest rate for a period of one year. Mr. Bhuwan, wise and happy comes back home and awaits for his fixed deposit to mature after a year only to realise that the prices of goods and services has risen at almost the same rate at the end of the year. Now this is called an Invisible Robbery. As per sources, inflation for fiscal 2024 stood at 5.4 per cent, at par with the central bank’s forecast.
One way of understanding inflation is, for instance, you bought a list of household essentials last month at the expense of INR 1,000, but this month, the price of a specific food item in the same list has risen, leading to an increase in the cost by, let’s say INR 1,100. You may be forced to remove an item from your cart or buy the product at an inflated price by paying extra, which may affect your monthly budget.
A country’s economy is measured based on it’s production of goods and services within a period of time, which is called GDP. The more production of goods and services, the better it is for the economy. But as the per capita income increases in an economy, the standard of living rises, hence causes increase in spending of consumers thus causing inflation.
The government through its fiscal and monetary policy uses various tools for curtailing inflation so that the economy is nearly at equilibrium and there is no income disparity but even after application of various measures to control inflation, the market forces of demand and supply is far greater than all these tools as we all are humans and this market force is derived on human behaviour, which is often the most unpredictable thing in this world.
(The writer is a banker with SISCO Bank. Views are personal. Email: truesasonian13@gmail.com)