The rise in the average cost of goods and services in an economy leads to the lowering of the consumers’ purchasing power. This situation is known as Inflation. Deflation, on the other hand, is the opposite of Inflation and occurs when the cost of goods and services decreases, increasing consumer income.
For instance: You want to buy a pair of shoes, which costs a thousand rupees. Because you don’t have that much right now, you choose to purchase it later. You return to the same store a month later and discover that the shoe costs’ have now increased to eleven thousand rupees. Although the value of the thousand rupees has not changed, its purchasing power has. This circumstance is a classic illustration of inflation, which affects many goods and services virtually daily in life. It doesn’t matter how small the object is, whether it’s a pack of small chewing gum or a car, every product experiences a situation like this.
IS INFLATION GOOD OR BAD?
A moderate bit of inflation is a sign of a healthy and expanding economy as it can assist drive growth by increasing production. More money transfers result in more spending, thus increasing the aggregate demand. To meet increasing demand, production increases. Thus, in the end, the whole economy grows. Whereas, significant inflation is typically regarded as bad because it decreases your quality of living by decreasing your purchasing power.
TYPES OF INFLATION
DEMAND-PULL INFLATION: Demand-pull inflation occurs when the overall demand rises while the supply either stays the same or declines. Prices of products and services rise when supply cannot keep up with rising demand. Other causes of demand-pull inflation can be government policies and rapid increases in the money supply.
For instance: The manufacturing cost of a laptop increases thus increasing its price too. This change will also affect the industries related to laptops like the IT sector.
COST-PUSH INFLATION: Cost-push inflation happens when overall prices rise due to rising labour and raw material costs. The overall supply of goods and services in the economy may decline as manufacturing costs rise. Cost-push inflation results from the manufacturing price increases being passed on to consumers because the demand for goods hasn’t altered.
For instance: OPEC (Organization of the Petroleum Exporting Countries) is an intergovernmental organization of 13 countries. A vast bulk of the world’s oil reserves are under its control, and in 1973 it curtailed output, which sent prices rocketing 400%. As a result, businesses that relied heavily on oil and gas as inputs had to drastically increase their production costs to keep up with demand.
BUILT-IN INFLATION: Built-in inflation occurs when employees seek more pay to keep up with increased living expenses. A self-reinforcing cycle of salary and price rise results from businesses increasing their pricing to cover their rising wage costs.
For instance: It is pretty common nowadays. In almost every sector it is visible that the wages of every type of worker keep up with the increasing prices.