The basics of inflation are easy to understand.
When there's more money in the system, prices go up. That's the most fundamental rule in economics: prices are set by the law of supply and demand. The higher the supply, the lower the price. Higher the demand, Higher the price.
Let us understand what is the above Pravachan means -
Inflation and Purchasing Products-
'Purchasing Power’ and Mr. Muffler Man
There is a sabzi wala in a locality, with a daily supply of 10 Kg of Onions , He sell Oninons to the residents in the locality. Mr. Muffler Man also live in the same localty. He purchase the onions from the Sabzi wala at Rs 10 for a kg. Now Suddenly on one fine day the bosses of the people of the locality decides to increase the salaries of the people, including our Muffler Man. Now every one will have more money in their pockets. But our Sabzi wala have the same 10 Kg of onions with him. Now every one with more money in their pockets will want to buy more from that supply of 10 Kgs. Now our Sabzi wala suddenly starts to think in the Ambani and Adani way (Yahi to scam hai ji). He started charghing Rs 20 for one Kg because people have money and the supply is short. So to get the onions for the daily meal Mr. Muffler Man will have to shed that extra money for those onions. So as a result the prices of the onions increase.
Inflation and Debt – Muffler Man and Chota Rahul
Price inflation is a debtor's best friend and a creditor's worst enemy. Let’s see how,
our Mr. Muffler Man gave Rs. 10K to Mr. Chota Rahul in 2006 for a period of three years, after two years inflation occurred, now the value of that 10k becomes equivalent to 8k (loss in the value of Rs), Because the commodities that Mr.Mufflar Man could buy in 2006 with those 10 K is lesser as in 2008 due to inflation the same thing will cost more. The effect of inflation on debtors is positive because debtors can pay their debts with money that is less valuable.
Inflation has the following adverse effects on the economy:
Other negative impacts-
- Black-marketing - Expecting inflation many mafias start to collect the onions and kerosene in their backyards for releasing these when the inflation strikes, hence they will make big bucks in no time.
- CAD Swelling - Inflation can make an economy uncompetitive. For example, a relatively higher rate of inflation in India can make Indian exports uncompetitive higher current account deficit and lower economic growth.
- Unemployment - Inflation comes along with a gift package of unemployment, companies with limited resources will start to fire people on the name of cost cutting and also the new recruitments will not happen resulting in not so aache din for aspirants.
Different stages of Inflation-
- Creeping Inflation- Creeping or mild inflation is when prices rise 3% a year or less.
- Walking Inflation - This type of strong, or pernicious, inflation is between 3-10% a year. It is harmful to the economy because it heats up economic growth too fast.
- Galloping Inflation - When inflation rises to ten percent or greater, it wreaks absolute havoc on the economy. Money loses value so fast that business and employee income can't keep up with costs and prices. Foreign investors avoid the country.
- Hyperinflation - Hyperinflation is when the prices skyrocket, the currency becomes a piece of trash, Zimbabwe experienced a similar conditions in previous years.
