What is Inflation?

The price of goods keeps on increasing continuously from time to time and before you fill your pocket, it seems empty, now you pay a lot of money to buy those items even in small quantities.Dou u know what this situation is? This condition is termed as Inflation. Let us know this word closely and analyze it without any complicated language.

What is Inflation?

Suppose I gave ₹50 in 1980 and after taking so many years now, in 2021 you thought of buying something from them. Will the value of those 50 rupee be the same till now? No the value will now be measured at around 1 Rupee 25 paise.But why? Here comes Inflation in picture. A ₹50 rupee note buys lesser amount of same commodity over a period of time. You will not get the commodity at the same price you had purchased it a few years back. Because there has been increment in the price of the commodity during some time. Inflation is the persistent rise in the general level in prices of commodity means rise in the prices of goods and services. These can be daily use items like clothing, food, transport,consumer staples, industrial goods etc. Inflation in very few words is the average price rise over time. In actual sense inflation indicates a fall in purchasing power because money loses its value as inflation enters.

Types of Inflation

Inflation is categorised on the 2 bases Speed and Causes 

On the basis of speed

1.Creeping inflation- It is just like baby who just knows how to crawl in this type the rate of inflation ranges from 2 to 3 % last 4% a year.It may not be visible but becomes a problem if continues to exist. 

2.Walking Inflation- Now it is just like creeping inflation has grown up and started increasing its size to some extent. In this type the rate ranges from 2% to 10%.Till 3% to 4% it creates no problem but when increased beyond this it hurts the economy. This inflation is also called 'Moderate inflation'.

3.Running Inflation- When inflation starts rising above a certain (significant level) it is actually a rate between 10% to 20% which is called running inflation. Now, The Kid knows running. It impacts the economy to extensive proportion.

4.Galloping Inflation- This type of inflation is very destructive for the economy and cannot be controlled easily.This ranges from 20 % to triple digit number(999%).

5.Hyperinflation- This is the most extreme forms of inflation. It has not been defined  specifically but this is the worst situation of economy leading to Rapid decline in the value of money. It starts from 2000 % and this is enough to tell you how much destructive it is in nature.

On the basis of Causes

1.Cost push inflation- This occurs when prices rise due to higher cost of production and raw material.To retain the profit manufacturing units increase the prices which causes this type of inflation.

2.Demand pull inflation- An economic Boom leads to this type of inflation.Means people have much money to invest. In this scenario demand is an excess as demand is in excess the manufacturers will produce more products and services to fullfil the demand and get much profit.

3.Wage push inflation- This is actually the combination of above these discussed two inflations(cost push and demand pull) and caused by rising wages of employees.And in order to be profitable condition the prices of products/services arise. 

Causes of inflation

1.A good Economic Growth- When an economy gets Boom,people will have much money to invest means they will have more spending power leading to increase in 'demand' now the companies,fulfilling the needs of the people by producing their product for them will increase the price of the product as the demand is high and they want to earn as much money as possible.This is the basic reason why Dearness occur. This type of inflation is called demand-pull inflation.

2.Increase in prices of raw materials- The raw materials required for production sees increment in its cost so the manufacturers using this raw material to get final product as output increase the price of that product because obviously cost of this material has increased and manufacturer will want to make some profit any how to sustain in market this type of inflation is called cost push inflation.

3.Increment in salary of an employee- This might be seen when government/company increases salary of employees. To keep itself unaffected by the amount of that increase, to be in profit often price of product increases.This type of inflation is called Wages push inflation.

4 .Currency depreciation- Yes this is the most dangerous reason for inflation. One of the major causes for this reason is the printing of money in excess which can create conditions of hyperinflation. 

How is inflation measured?

There are two indices responsible for the measurement of inflation 'Wholesale Price Index'(WPI) {many countries like USA use Producer Price Index (PPI)} and Consumer Price Index(CPI).WPI reveals about prices of commodities traded between business houses.It Measures Wholesale. 

While, CPI reveals the prices on which the commodity is being purchased by the consumer. It measures education,food, electronics etc. 

In India inflation is measured and controlled by Ministry of Statistics and Programme Implementation(MoSPI)

Mathematically it is calculated by formula 

%inflation rate = (current CPI- First CPI)×100/Past CPI

{Current CPI minus First CPI upon Past CPI multiply of 100 with whole ratio} 

Optimum level of inflation

Inflation of 0% is called 'Deflation' (prices go down in this situation). While much higher rates are also bad for the economy. Ohh if Neither high rate or low rate of inflation is good for the economy. Then what should be the optimised value of it? Any guess??

For developed countries like USA, Norway,Russia,South Korea etc. It should be around 2% with margin of 1%. For India,it is 4% (with upper tolerance level of 6% and lower tolerance level of 2%). In other words 2% is the margin for India. If inflation is greater than this optimum level it is dangerous for the economy(not good for the capital investment). If inflation is lower than this level it leads to slow economic growth (downfall in demands for goods and services).