Inflation and its Effect on Economy

The Inflation is the rate at which general price level increase over a period of time and inflation indirectly proportional to Purchasing power. for ex Annual inflation 10 % means a good which cost Rs 100 1 year back will cost Rs 110 now. Inflation is measured for a basket of goods and service like food article,Fuel,Power,Electricity,Transport etc and have different weightage in Inflation Index.So the overall increase (price some may increase and some will decrese) in the basket price is inflation. Inflation is classified in to three Creeping Inflation, Galloping Inflation and Hyperinflation. When inflation is growing on single digit it is creeping inflation and it have some good effect on economy. If the rate is on double digit or triple digit it is Galloping and if Price rise is large and accelerating it is Hyper inflation Latter two have some bad effect on economy. The major cause of inflation are demand pull inflation i.e. demand is growing faster than supply then the price will increase and it usually happens in growing economies the other side of this is supply shock inflation where reduction in supply due to bad weather, Crop failure, calamities etc.Another is cost pull inflation where the companies input cost go up due to increase in wages,tax,Raw material etc so in order to maintain the profit margin company will increase the price of good.
.
.The major sufferer for the inflation is fixed income people as inflation will reduce there purchasing power and if inflation remain on high zone there will be reduction in consumer spending and in long run it will affect the economic output and in turn growth rate i.e. if inflation is on 10 % the actual price will be more than 10 % because of cumulative increase in price of all commodities and companies will increase the price above their earlier profit margin to compensate for decrease in sales due to price rise and increase in other expense like wages. So higher and higher the rate of inflation more disastrous it will be for economy. The other group which will be affected by inflation are creditors as there income will fall due to monetary depreciation and if inflation will remain on higher side than other countries domestic product will loose the Competence. Higher inflation with high unemployment will result in Stagflation have a very bad effect on economy. Deflation which is general decrease in price and little inflation is just as bad as higher inflation It indicate economy is weakening. Central Bank attempt to stop severe inflation along with severe deflation to keep economy strong. In case of supply shock inflation monetary policy cannot do any thing and the decrease in supply has to compensate by import or will have substitute the supply affected commodity with some other commodity..Moderate inflation especially demand pull inflation will have a tonic effect on economy and it is a sign that economy is growing. Moderate inflation help the companies and inflation rate of 3-5% is good for economy. In long term investment in Equity shares offer good protection against inflation Other investment options against inflation are Real estate, basic commodities, Inflation indexes. So inflation will have a good effect on economy unless it is too high or low. In case of deflation better options are bonds and bank deposit. So take better investment decision to fight against inflation. br>

Previous--SIP

DISCLAIMER: Please read our DISCLAIMER before using this site. These are just few parameters of a stock/index/commodity/options/futures selected by a computer program .In no circumstances it should be used or considered as an offer to sell or a solicitation of any offer to buy or sell the Securities mentioned in it. If you select any of these stocks for your trades or investment, you do so at your own risk and we are not responsible for any loss or damage arising from your decision.