Q:42:Inflation: a new battle.

INFLATION

A NEW BATTLE

INFLATION: A NEW BATTLE- Yes, I agree with this statement because today we all are facing this critical situation. INFLATION means rise in general price level of goods and services. When price rises purchasing power of people falls than before, so it affects our standard of living because savings are less than investments. Day by day inflation is growing up poor people can’t fulfill their basic needs like Roti, Kapda Aur Makaan. Inflation also affects fixed income group people because the income remains the same and they have to purchase same goods with high price. In this way inflation directly affects on growth of income. Inflation affects business class also; the price of raw material is going to increase day by day due to this cost of goods and services increases.

We can see that inflation affects our economy by one way or another.

Let’s discuss in detail about inflation…….

INTRODUCTION:

Inflation can be defined as the rise in overall price level in the economy, i.e. rise in price of all the goods and services. When prices rise, people buy fewer goods than it had been before.

Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. At its most basic level, inflation is simply a rise in prices. When prices of goods and services extends, the purchasing power of consumers falls.

“Inflation means rise in the general price level over and above the normal price line”.

Inflation is when there is sudden rise in the price of commodity. Whenever the inflation increases there is not always rise in the price of all commodities but certain commodities prices decreases. For e.g. prices of food items like vegetables, fruits, pulses, oil, wheat, rice, etc, conveyance, but the prices of education and health care is increasing day by day which affects the living standard of people.

Inflation is commonly understood as an increase in the general price level and consequent fall the value of money.

Inflation can have many effects that can simultaneously have positive and negative effects on an economy. Negative effects of inflation include a decrease in the real value of money and other monetary items over time; uncertainty about future inflation may discourage investment and saving, or may lead to reductions in investment. This can reduce overall economic productivity rates, as the capital required to retool companies becomes more elusive or expensive.

CAUSES OF INFLATION:

v Increase in Population: Increase in population leads to increased demand for goods and services. If supply of commodities is short, increased demand will lead to increase in price and inflation.

v High Indirect Taxes: Prices tend to rise on account of high excise duties imposed by the Government on raw materials

v Black Money: Black money in the hands of tax evaders and black marketers as an important source of inflation in a country. Black money encourages lavish spending, which causes excess demand and a rise in prices.

v Poor Performance of Farm Sector: If agricultural production especially food grains production is very low, it would lead to shortage of food grains, will lead to inflation.

v Expansion of Bank Credit: Rapid expansion of bank credit is also responsible for the inflationary trend in a country.

v Deficit Financing: Deficit financing means spending more than revenue. In this case government of India accepts more amount of money from the Reserve Bank India (RBI) to spend for undertaking public projects and only the government of India can practice deficit financing in India

v Over- Expansion of Money Supply: Money supply exceeds the availability of goods and services in the economy, it would lead to inflation.

EFFECTS OF INFLATION:

v Effects of inflation on fixed income group: Inflation hits wage-earners and salaried people very hard. Since wages do not rise at the same rate and at the same time as the general price level, and the real income of the wage earner decreases.

v Effects of inflation on farmers: Farmers usually gain during inflation, because they can get better prices for their harvest during inflation

v Effects of inflation on investors: Those who invest in debentures and fixed-interest bearing securities, bonds, etc, lose during inflation. However, investors in equities benefit because more dividend is yielded on account of high profit made by joint-stock companies during inflation.

v Effects of inflation on Business Community: Inflation is welcomed by entrepreneurs and businessmen because they stand to profit by rising prices. They also find that prices are rising faster than the costs of production, so that their profit is greatly enhanced.

v Effects of inflation on gross domestic savings and less capital formation in the economy and less long term economic growth rate of the economy.

CONCLUSION:

The control of inflation has become one of the dominant objectives of government economic policy in many countries. Effective policies to control inflation need to focus on the underlying causes of inflation in the economy. For example if the main cause is excess demand for goods and services, then government policy should look to reduce the level of aggregate demand. If cost-push inflation is the root cause, production costs need to be controlled for the problem to be reduced.

"Inflation is basically the product of serious mismatch in between demand and supply. If I understand correctly, it does not mean we should not have growth. We should have growth but with moderate rate of inflation, but the consequences of inflation are quite serious. It has bad effect on growth because it increases uncertainty and discourages savings. It is also damaging for the balance of payment, because it makes imports cheaper.

To control inflation the government can also take some protectionist measures( such as banning the export of essential items such as pulses, cereals and oils to support the domestic consumption, encourage imports by lowering duties on import items etc.)