INFLATION

INFLATION: A CURSE OR BLESSING?

These days everywhere in the world the most heard word is INFLATION. Every country is facing inflationary tendencies though the rate of inflation varies from country to country. The most serious thing to be addressed now is that is inflation atrocious for an economy or is it responsible for imposing an extra burden on household’s budgets. Majority of people think that inflation causes various problems and is a major reason why people are not able to make much improvement in their lifestyle which they would have had there been no inflation. Beside this inflation become a barrier in everybody’s saving and  causes problems for future planning like if the prices do not change one can get easily on fingers as to how much they should save for the future. Very high inflation is also a big problem and needs serious attention. But a nominal one is okay and can be ignored. Although inflation in any form is not a good thing for masses.

An established opinion suggests that people care about fairness and dislike paying prices that they view as unfair. Kahneman, Knetsch and Thaler [1986] present evidence that while most people regard it as acceptable for firms to raise prices in response to higher marginal costs, they find it unfair for firms to raise prices in response to elevated demand. Because consumers typically do not know firms’ marginal costs, their perceptions of how fairly firms price their goods depend upon their estimates of these marginal costs. Rational consumers should be able to invert firms’ pricing rules and infer marginal costs in equilibrium

It’s quite evident that global events affect the inflation rate and undoubtedly, rising oil and gold prices are contributing to this. You’ve surely heard the warning before. Inflation, it seems, is upon us. Our currency value is worth less and less and the price of our daily necessities continues to increase at alarming rates. Here are just a few of the ways by which inflation, whether it be monetary or price inflation, affects us negatively.

1.       Fixed income recipients feel the pinch because as prices go up, income doesn’t also go up.

2.       Since people tend to spend more cash during times of high inflation, national savings decreases.

3.       Many companies go out of business because of the losses incurred because of inflation.

Let me clarify here as what actually inflation means, Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time, Often expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation’s currency. Some of the other words that can be used to indicate inflation in the society are boastfulness, braggadocio, aggressiveness, assertiveness, audaciousness, boldness, brassiness, cheekiness, cockiness, forwardness, impudence, insolence, rudeness,  grandiloquence, flamboyance, flashiness, garishness, gaudiness, glitz, mummery, ostentation, ostentatiousness, show, showiness.

To buff up the explanation a more exact definition of inflation is a situation of a sustained increase in the general price level in an economy. Inflation means an increase in the cost of living as the price of goods and services rise. Inflation is an economic term that refers to an environment of generally rising prices of goods and services within a particular economy. For example, prices for many consumer goods are double during last 2 years. Inflation can be measured through CPI (Consumer Price Index) and PPI (Producer Price Index) these two are considered as major indices. It’s an economics term that means you have to spend more to fill your gas tank, buy a liter of milk, buy your grocery or get a haircut. Inflation increases your cost of living. Inflation reduces the purchasing power of each unit of currency. It is quite evident that lenders are hurt by unanticipated inflation because the money they get paid back has less purchasing power than the money they loaned out. Borrowers benefit from unanticipated inflation because the money they pay back is worth less than the money they borrowed.

There are two main causes of inflation, Demand-pull and Cost-push. Both are responsible for a general rise in prices in an economy. Thus, inflation has an impact on the cost of living and the development of the economy as a whole. Starting from there, we can identify inflation can be, demand-pull, cost-push, and built-in inflation. By now we all know that Inflation is a measure of the rate of rising prices of goods and services in an economy. Inflation can occur when prices rise due to increases in production costs, such as raw materials and wages. A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.

When inflation is too high of course, it is not good for the economy or individuals. Inflation will always reduce the value of money, unless interest rates are higher than inflation. And the higher inflation gets, the less chance there is that savers will see any real return on their money. It is measured as the rate of change of those prices. The most well-known indicator of inflation is the Consumer Price Index (CPI), which measures the percentage change in the price of a basket of goods & services consumed by households.

Let me indicate few ways by applying which we can try to control inflation both on larger country level as well as on micro individual levels, as through them we can learn about overcoming and saving money even in the face of inflation, so we have to know what we’re up against. Now that we know what it is we’re fighting, we can arm ourselves for the future. Some of the ways that you can put on your game face and fight against inflation are mention below; I hope that with these you will be able if not to overcome Inflation but at least in lessening it to a certain extent.

Ø  Whatever you can, grow Your Own Food.

Ø  Try side kick by earning Extra Cash on the Side.

Ø  Inculcate habit of whole sale buying and buy in Bulk.

Ø  Encourage habit of saving and continue to Save Your Money.

Ø  Trade your services through a Strong Support Group in your neighborhood.

Ø  Be a smart Investor & Invest in Goods or Commodities, Not Money.

Ø  Go for less expensive and non-branded items and Trade in Your SUV.

Ø  If possible ask for a Raise.

Ø  Saving Money on Gas, petrol and other items.

Ø  Go for energy saving equipment and try to save Electricity and Energy:

Ø  Always be on the lookout for good opportunities and consider Investing in Tips

In the end just for encouraging my readers who surely will face Inflation  I would say much to everyone’s amazement inflation is sometimes good as well like take the case if employers want to impose a wage cut (which may be due to various economic reasons) then inflation becomes a helping hand. Inflation also helps in bringing significant economic changes in the society. Inflation can benefit either the lender or the borrower, depending on the circumstances. If wages increase with inflation, and if the borrower already owed money before the inflation occurred, the inflation benefits the borrower. The key benefit of inflation is that it reduces the real value of government debt. It does this because tax revenues increase approximately in proportion to inflation. Government's fixed debt payments therefore become a smaller part of the tax take and more affordable. In other words, when the economy is not running at capacity, meaning there is unused labor or resources, inflation theoretically helps increase production. Inflation also makes it easier on debtors, who repay their loans with money that is less valuable than the money they borrowed. The cost of inflation is a psychological one that derives from a mistaken belief by consumers that transactions have become less fair. In fact, it is this wrong perception that makes an increase in money supply expansionary: consumers wrong attribute the higher prices arising from higher money supply to higher markups; wrong perception of higher markups angers them and makes their demand for goods more elastic; in response, monopolists reduce their markups, thus stimulating economic activity. How rosy all this may be but to me Inflation will always be a curse.

BY: OVAIS ASAD KHAN