What is Inflation?

Inflation is the rise in the general level of prices of goods and services in an economy over time. It impacts the purchasing power of money — meaning ₹100 today might not buy you the same amount of goods next year. Inflation is a key factor in economic decision-making, from setting interest rates to determining wage growth.

Example of Inflation in India:

Parle-G Biscuits: A pack of Parle-G biscuits cost ₹4 in 2000. In 2023, it cost ₹10. This increase in price is due to inflation.

‍

How Inflation is Measured in India

Inflation is primarily measured using two indexes in India:

1. Consumer Price Index (CPI): Measures the average change in prices that consumers pay for a basket of goods and services.
2. Wholesale Price Index (WPI): Tracks the price of goods sold in bulk (wholesale) before they reach consumers.

Recent Inflation Rates in India

In India, inflation rates have fluctuated in recent years due to various factors, including the pandemic, supply chain disruptions, and global oil price volatility.

Recent Inflation Rates in India:

Year                                                           CPI Inflation Rate (%)

2020                                                          6.2

2021                                                           5.1

2022                                                          6.7

2023                                                          4.6 (estimated)

‍

Types of Inflation

Demand-Pull Inflation

Demand-pull inflation occurs when aggregate demand in the economy exceeds the available supply of goods and services. This can happen due to various factors, such as:  

• Increased consumer spending: When consumers spend more, it puts upward pressure on prices.
• Government spending: Government investment can stimulate demand and lead to inflation.
• Exports: Increased exports can boost demand for domestic goods and services, raising prices.

‍

Cost-Push Inflation

Cost-push inflation occurs when the cost of production increases, leading businesses to raise prices to maintain profit margins. Common causes of cost-push inflation include:

• Rising input costs: Increases in the prices of raw materials, energy, or labor can drive up production costs.
• Supply chain disruptions: Disruptions in supply chains, such as those caused by natural disasters or geopolitical events, can lead to shortages and higher prices.
• Increased taxes: Government-imposed taxes on businesses can raise production costs and contribute to inflation.

‍

Built-in Inflation

Built-in inflation, also known as inflationary expectations, occurs when people anticipate future inflation and adjust their behavior accordingly. This can create a self-fulfilling prophecy, as businesses and workers may demand higher wages and prices to compensate for expected inflation.

‍

Other Types of Inflation

• Structural Inflation: Occurs due to structural imbalances in the economy, such as bottlenecks in production or inefficient resource allocation.
• Imported Inflation: Occurs when prices of imported goods increase, often due to exchange rate fluctuations or higher prices in foreign markets.

‍

Impact of Inflation on Indian Companies

Inflation affects various sectors in India differently:

• FMCG Sector: Companies in the Fast-Moving Consumer Goods (FMCG) sector are often more sensitive to inflation due to their reliance on raw materials and their need to compete in a price-sensitive market.
• Automobile Sector: The automobile sector is also affected by inflation, as the cost of raw materials, such as steel and aluminum, can increase production costs.
• Infrastructure Sector: Companies in the infrastructure sector, such as construction and real estate, can be impacted by rising interest rates and increased costs of materials.

Is Inflation Good or Bad?

Moderate inflation is considered beneficial for economic growth, while too much inflation can lead to instability.

1. Positive Side of Inflation:some text
   • Encourages Spending: A small amount of inflation encourages people to spend money rather than save it because the value of money decreases over time.
   • Debt Relief: If you have loans, inflation reduces the real value of your debt over time. For example, those who took housing loans from HDFC Bank in the 2000s at a fixed rate benefited from inflation because their repayments became cheaper over time in real terms.
2. Negative Side of Inflation:some text
   • Erodes Savings: Inflation reduces the real value of your savings. For instance, if you save ₹1,00,000 at an interest rate of 4% but inflation is 5%, your purchasing power has decreased.
   • Rising Costs: If inflation is high, salaries often don't rise at the same pace as prices, reducing the purchasing power of workers.

          Scenario                                                                     Effect

Low Inflation (1-4%)                             Stable economy, growth, debt relief

High Inflation (5-8%)                            Rising costs, pressure on households

Hyperinflation                                       Economic collapse, loss of savings value

‍

Conclusion

Inflation plays a significant role in shaping India’s economy. While moderate inflation is a sign of healthy growth, high inflation can cause financial strain on consumers and businesses. By understanding how inflation works, you can make better decisions in managing your investments, savings, and loans in the Indian market.

‍