Inflation

Hi Everyone,

I actually got bored writing, also did not know what to write on. While sitting over a drink with some of my friends, I mentioned that I have started writing my own blog. I explained that I would be writing on some finance topics. And when it comes to finance everyone wants to know more. This is where the money is. Then one of them started asking what Inflation is. That is when I thought this is a good topic to write on.

We keep reading everyday that inflation is gone up, it has reached 12.65% etc. So one of them mentioned that for me everything is the same. Even when inflation was down prices were going up, so how does this 12.65% make a difference and how is it affecting our lives, or should we say prices.

Let’s check what Wikipedia says about Inflation. As per Wikipedia, in economics, inflation or price inflation refers to a general rise in the level of prices of goods and services over a period of time. That means it is nothing but a comparison of prices from one period with another. So this brings us to another conclusion, if the price rises there is inflation.

If there is a rise in prices there is inflation. With our income remaining constant, if the prices go up, it affects our saving potential or our life style. So the value of our money is gone done. What I mean is Rs.10 will be Rs.10 but what I can get in Rs.10 will be less i.e. the real value of money has reduced or our purchasing power has reduced.

So what happens when Inflation goes up? As explained earlier our savings potential is reduced. This affects investments, since we invest our savings. And those with money or in business might go into the mode of hoarding, to generate more income. Because the cost of production or purchase also goes up. If there is less stock in the market, the prices will rise.
When we say comparison of prices, the question is prices of which items. Usually the prices of a number of items of common use as a basket are compared. A series is made of all these items on a weekly basis and this series is compared to find out if the price is going up or down.
Usually the series that is used is Consumer price Index. Consumer Price Index typically contains items which are generally used by normal consumers. In India the Consumer Price Index is calculated by the Central Statistical Organisation. They first collect the average prices by cities and then tabulate the all India figures.

The main Categories
1) Food, beverages, tobacco
2) Fuel and light
3) Housing
4) Cloth., bedding and footwear
5) Miscellaneous

To Conclude, as my friend had mentioned earlier prices were always rising, then why the noise now. The reason is simple, earlier the rate of rise was small, not it has gone up. Prices are going up rapidly or at a higher rate.