In 2024, inflation in India has shown a gradual decrease when compared to the results of the past two years. But with the post-COVID timeline and the formation new political year, how is the ecnomny gonna take it? Many might still be unaware to the term inflation or will have a pseudo-knowledge. Let’s hear it, so what is inflation, and how it can affect us?
Inflation, in simple terms, refers to the general increase in prices of goods and services over time. When inflation occurs, each unit of currency buys fewer goods and services than it did before. It's typically expressed as a percentage and measured over a specific period, such as a month or a year. In India, as in many other countries, inflation is a significant economic indicator and can have several effects on various aspects of the economy:
Let's say you're a consumer in India, and you typically spend ₹5000 per month on groceries. However, due to inflation, the prices of essential items like vegetables, grains, and cooking oil have increased by 10% over the past year. Now, your monthly grocery bill would be ₹5500, assuming you buy the same items in the same quantities.
If your income hasn't increased to match this rise in prices, you would either have to cut back on other expenses or dip into your savings to maintain your standard of living. This decrease in purchasing power affects not only your personal finances but also the overall economy as consumer spending slows down, impacting businesses and employment levels. Additionally, if inflation continues to rise, the central bank might respond by increasing interest rates, which could further dampen economic activity.
Apart from this, how it can affect each part of the economy we are living in.
Purchasing Power: One of the most immediate effects of inflation is the decrease in purchasing power. As prices rise, the same amount of money buys fewer goods and services. For example, if the inflation rate is 5% annually, a product that costs ₹100 this year would cost ₹105 next year. Therefore, people's savings and incomes effectively decrease in real terms.
Interest Rates: Central banks often use interest rates as a tool to control inflation. When inflation is high, they might raise interest rates to reduce consumer spending and borrowing, thus slowing down the economy. On the other hand, during periods of low inflation, central banks may lower interest rates to stimulate spending and investment.
Cost of Borrowing: Inflation affects the cost of borrowing money. When inflation is high, lenders charge higher interest rates to compensate for the decrease in the value of money over time. This makes borrowing more expensive for individuals and businesses, which can reduce investment and economic growth.
Income Distribution: Inflation can impact income distribution within a society. Those on fixed incomes, such as pensioners or people with fixed-wage jobs, may struggle to keep up with rising prices. Meanwhile, individuals with assets that appreciate with inflation, such as real estate or stocks, may benefit.
Business Planning: High and unpredictable inflation can disrupt business planning and investment decisions. Companies may find it challenging to forecast costs and revenues accurately, leading to inefficiencies and reduced investment in long-term projects.
International Competitiveness: Inflation can affect a country's international competitiveness. If domestic prices rise faster than those in other countries, exports become more expensive, leading to a decrease in demand for domestically produced goods and services abroad.
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