Updated: Sep 15, 2020
If I would have given you ₹100 in 1958 and you would have kept it under your bed and if you spent it today, you could have only bought a candy. Yes, it's value would have been ₹1.25 only.
If you did not understand, let's look at it the other way round. Something that costs you ₹100 today would have cost ₹1.25 in 1958.
Welcome back guys, today I want to talk about Inflation, why does it happen, and the consequences of it.
Inflation is basically the increase in the cost of goods and services or a decrease in the value of money.
WHY DOES INFLATION HAPPEN?
The most important question why does this happen, does the government control inflation, or economist decide it?
No, that's not the case, There are a lot of factors involved in it.
Today I want to talk about the four major reasons.
1. ECONOMIC BOOM
If an economic boom comes, that means everyone earns more money, if everyone earns more money their spending power will increase, If their spending power increases there will be more demand and due to which the companies will increase the prices of goods and services and therefore Inflation will occur.
Let's understand this by an example:
Imagine their's an airplane which has 100 seats in it. 100 people want to travel. There are 90 economy seats in the aircraft and 10 first-class seats. If everyone has more money and everyone can afford the First Class Seat, there will be more demand for it. So, the airline would increase the cost of the First class seat so only the richest could travel in the First Class seats and the company could earn more. So, basically, the cost of First Class Seats got Inflated.
This kind of Inflation is called as DEMAND PULL INFLATION.
The demand increase so the prize also increases.
2. INCREASE IN THE PRIZES OF RAW MATERIAL.
The cost of raw material could increase because of multiple factors, for example, if the cost of rice and wheat increases due to a bad monsoon the companies would increase the cost of their goods to be in profit.
This Kind of Inflation is called as COST PUSH INFLATION.
3. INCREASE IN YOUR SALARY.
Yes, I am not kidding when the company increases its employee's salaries, they have to increase the cost of their products to be in profit.
This kind of Inflation is called as WAGE PUSH INFLATION.
This kind of Inflation has more causes too, for example, if in a country there is low Unemployment then it will be harder to replace their employees, so everyone's salaries would Increase which again leads to Wage Push Inflation.
4. CURRENCY DEPRECIATION
This could happen because of many reasons, the most important of which is the Printing of more money by the Government.
Printing more money could also fire back because this may lead to HYPERINFLATION.
HYPERINFLATION happened in Venezuela recently and in Zimbabwe in the year of 2008.
10% Inflation in our country is considered a lot but in Venezuela in the years between 2016-2019, there was an Inflation of 50,000,000 %. Yes, 5 Crore Percent.
If we take the example of Zimbabwe, in 2008 the currency was losing it's valued at such a rate, that the Government had to print notes of millions and billions. There was a note of 1 Hundred Trillion Zimbabwean Dollar also.
It's Value was = 1 U.S Dollar
This is how bad Hyperinflation can be.
PRESENT DAY INFLATION
Today most of the countries are locked down so the demand has gone down, this is just the opposite of Demand-Pull Inflation. So, in most parts of the world Inflation is going down. In response to this, some governments have decided that they will transfer cash in the bank account of their citizens. What will be the consequences of this? I will tell you my answer later. What's you say? Comment in the comment box below.
What if, the inflation was zero?
Is inflation necessary?
By Just listening to this statement, most of us would be happy thinking that If inflation was zero there would be no cost increase we would save money and if were to keep the money under our bed, that would not lose its value.
But if you think a bit more, and look at the reasons for an inflation in a way that would be bad for us. Your salary would never increase. If this were to happen people would stop spending thinking that we can buy things later, due to which companies would not make money and if that happened it would eventually lead to the UNEMPLOYMENT.
Now, you may think that this is a very weird relation, this would never happen but this is true, it's weird but true.
This is the Phillips curve, this shows that Unemployment and Inflation are inversely proportional.
HIGH INFLATION = LOW UNEMPLOYMENT
LOW INFLATION = HIGH UNEMPLOYMENT
Of course, this is not valid everywhere. For instance, in the case of Hyper Inflation. Venezuela does not have 100 % employment despite having 5,00,00,000% Inflation.
INFLATION VS ECONOMIC RECESSION
This is how Economic Growth and Inflation do hand in hand. If economic growth increases, inflation increases, and vice versa.
This is not true in all circumstances. Sometimes when the economy is going down the inflation goes up. This is really bad. It's called as STAGFLATION.
This can happen when a country is going through a recession and the cost of raw material is still going up. The 2nd point we discussed. For example, if a country is going through Recession but the cost of Oil is going, in that case, Stagflation takes place.
The other way round of this could also happen, I mean there's deflation in a country and there is economic growth.
This happened in the U.S.A during 1870-1890. This period is called as "The Great Deflation." In that period, there was a deflation of 2% but still, the economy was growing, everyone's salary was growing and there was more money all around. It is said that it happened because there was a technological boom in the country.
Remember the question I asked you, "If people are given money for free in today's times, Will Inflation go up?" Have you answered it, No, do it know. Now read my answer, I feel that Inflation would not go drastically up, if you give money to the people, they are not going to spend it right away. Inflation will increase a tad bit. Our condition is so that we would probably only come to normal, if the government transfers money in people's bank account for free.
CONSEQUENCES OF INFLATION
No matter how important Inflation is for our economy, when it comes to personal consequences Inflation is bad for a common man. Your money is losing value day by day. You can't do this or you will be poor in 20 years.
You need to invest your money so that you can beat inflation. People Invest in Gold, Real Estate, Stock Market etc. so that there money doesn't lose it's value with time.