Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. Past performance of securities/instruments is not indicative of their future performance. Inflation can prove to be really harmful at high levels when wealth gets quickly eroded by rapidly rising costs. Venezuela is currently in a state of hyperinflation with an inflation rate in the thousands of percent, while countries like Sudan, Zimbabwe and Lebanon have very high inflation rates as well.

People spending more on healthcare has directly contributed to medical inflation in India. This moderation had convinced many to demand that the RBI should avoid raising interest rates — something the RBI did not do when it met on February 8. One can make portfolio of moderate equity portfolio also and still manage to get returns to beat the inflation. There can be two set of factors that can cause inflation in an economy.

Have you lately heard people exclaim that the cost of a certain test or medicine or even consultation charges have increased drastically in recent times? It is the cause behind the prices of medical equipment and treatment skyrocketing. And the ripple effect of this is that the premiums of healthcare plans are also increasing as insurers try to limit their risks. This means despite age, gender, and medical history, everyone is feeling the heat of rising prices of premiums. The purchasing power of a currency unit decreases when commodities and services grow more expensive. When inflation is high, the cost of living rises along with it, causing economic growth to decrease.

China followed next with 12%, Indonesia and Vietnam at 10%, and the Philippines at 9%. This had a direct impact on consumers as health insurance premiums also increased. In FY 2022, while the retail premiums went up by 16.5%, group health premiums increased by 31%. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing.

How does inflation work?

Inflation is a situation where the general price level of commodities increases, but in deflation, prices go down. Deflation means a situation in the economy when the general price level of goods and services declines. Deflation causes nominal costs of capital, labour, goods, and services to fall, leading to a decline in the general price level of consumables.

Most Central banks try to limit inflation in order to keep their respective economies functioning efficiently. There are certain advantages as well as disadvantages to inflation. The increasing prices may reduce the consumer’s purchasing power cutting off the costs of living. In worst-hit inflation, the citizens may even fail to meet the basic necessities. Due to the increased circulation of currency, the demand skyrocketed resulting in a shortage of supplies. As a result, the cost of production increased and the suppliers had to raise the prices.

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Inflation rate formula is the difference between initial CPI and final CPI divided by initial CPI. Domestic products might become less competitive if inflation within the country is higher. Inflation could lead to economic growth as it can be a sign of rising demand.

The government may introduce policies that increase competitiveness in the market. This leads to a slow increase in demand overtime, which means the prices of commodities. Inflation may seem to have only vices, in reality it is a by-product of growth in GDP. While one does not need to be an economist to know the growth in GDP indicates a healthy economy.

Inflation: Introduction, Types & Causes

It means that there is a healthy demand for the goods produced. Deflation on the other hand shows that there is very little demand for the goods produced. So, deflation discourages producers and leads to the slowing of economic growth.

When fewer goods are available, customers are willing to pay more to get the item, as illustrated in the supply and demand economic theory. Owing to demand-pull inflation, the consequence is higher prices. Inflation is nothing but the general rise in prices of goods and services of a nation over a period. In other words, inflation can be defined as the decline of purchasing power of a given currency over time. Inflation rate gives us the percentage increase in the basket of goods and services compared with specific period i.e. base year.

This would lead to a lower growth of consumer spending and an increase in investment. Hyperinflation is when there is rapid, excessive, and out-of-control price rice in the economy. Both of these lead to an increase in the price of goods and services. Inflation is the increase in the price of what are the 5 causes of inflation goods and services over time. Inflation causes your buying power to erode, meaning that the same dollar today buys less in the future. “The simple story is too much money chasing too few goods and services,” says Dean Baker, senior economist at the Center for Economic and Policy Research.

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When a central bank releases more currency into circulation or lowers interest rates, this encourages spending and drives prices up. Consumers simply have access to greater amounts of money, thus allowing them to purchase wider varieties of goods and services at increased costs. Inflation is an unfortunate economic reality wherein prices for goods and services rise steadily with time. It affects all individuals, businesses, governments, and nations. When inflation strikes, the value of currency decreases exponentially, leading to a decrease in purchasing power. The causes of inflation are complex and depend on various factors such as macroeconomic policies, supply-and-demand dynamics, natural disasters, or government interventions.

To ensure that your money is keeping pace with inflation, consider saving and investing your money when possible. You can also talk to your employer about cost of living adjustments over time. The inflation rate in India is more likely anticipated to decrease on account of several welfare measures and urban development initiatives as propagated by the Modi Government. When inflation rate of growing economies is on a steep rise as compared to other nations of the world, our GDP levels become less competitive. Pandemic – The covid pandemic has had a significant impact on the economy.

• Debt Reduction – With the cost of almost everything going up, it can be tempting to rely on credit cards to help you afford your expenses.
• More than just a decline in purchasing power might result from an increase in inflation.
• Crude oil is used in refineries for the manufacturing of gasoline and other fuels.
• Administrative measures taken by government like strengthening of Public Distribution System also plays a crucial role in curbing inflation.
• Lockdowns, working from home, and physical distancing have seen people spend more of their household budgets on food and housing while fewer people buy non-essentials such as flights and clothes.

Every one of us heard our parents talking about the prices of goods in previous times and how it increased over time. The causes of inflation can be either more demand for goods than what is available in the market causing prices to rise or it could be due to increase in the costs of inputs in production process. Here real income is another term of saying the standard of living, and in the case of inflation saying real income declines means that the standard of living in an economy declines as well. While this might be one way to perceive it, in reality the price changes at different speeds. Some prices of commodities may change every single day for instance, wages; some may be adjusted to remain constant with the help of contracts, such as salary. In inflationary environments, prices rise inevitably and as a result the decline of purchasing power is an inevitable phenomenon as well.

Nevertheless, it is customer demand that gives businesses the power to boost costs. An expansion in the money supply in the economy while the number of commodities available for purchase in the economy remains constant pushes the prices of those commodities upwards. This increases the overall prices of commodities in the economy. In cases where the government goes on a spending spree, prices go up. However, if the growth of GDP, which also subsequently accelerates inflation, is left unchecked, the impacts could be devastating, and could bring hyperinflation into picture. While incontrollable rise in commodities is stated, hyperinflation can render a currency useless and crumble the whole economy, while dragging other economies around it.

Impact of inflation on mutual fund

The inflation index is helpful in identifying how much is the rise in inflation every year. Introducing policies to increase the efficiency and competitiveness of the economy helps in reducing the long term costs. Higher Income Tax rate can reduce the spending, and hence resulting in lesser demand and inflationary pressures. CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner.

To combat this, the countries may seek loans from the World Bank, IMF, and other financial organizations. As inflation continues to grow, it may affect your cost of living, investments as well as future retirement plans. An increase in the circulation of currency can be one of the major causes of inflation. Printing or circulating excessive money is never a solution to support the falling economy. The recent economic crisis in Sri Lanka with an inflation rate of 17.5% is attributed to the devaluation of its currency. If the number of seats is less and the demand is high, the ticket prices would eventually be increased and sold to the ones who can pay for them.