Inflation is generally a rise in prices due to several factors. To be precise, inflation is a sustained increase in the general price level in the economy over a period of time. Also, it measures the average price change in commodities and services over a period of time.
What Is Inflation Rate?
The inflation rate is referred to as the percentage increase or decrease in prices during a specified period of time; usually, it’s over a month or a year. The percentage highlights how quickly the price rose during the period.
Basic terms of inflation rate:
Different types of shares
As per section 43 of the Companies Act 2013, the share capital of the company is of two types:
- Hyperinflation: If the inflation rate is more than 50% in a month.
- Stagflation: If inflation occurs at the same time as the recession.
- Asset inflation: When the prices rise in assets like housing, gold or stocks.
There are two components which play a major role i.e. misery index and unemployment rate. When misery index is higher than 10% it indicates that the people can suffer from recession, galloping inflation or both.
Causes of Inflation
Though the root cause of inflation is rising prices, these can be attributed to three different factors:
- Demand-Pull Inflation: It occurs when the overall demand for goods and services increases more rapidly than the production capacity. It creates a gap between demand and supply i.e. higher demand and low supply. Thus, resulting in increase in prices.
- Cost-Push Inflation: It occurs when there is an increase in the prices of production process inputs.
- Built-In Inflation: This cause links to adaptive expectations. When the price of goods and services rises, the labor expects more wages, resulting in higher cost of goods and services.
On different sets of goods and services, multiple types of inflation values are calculated and traded as inflation indexes:
- The Consumer Price Index (CPI): It is a measure that examines the weighted average of prices of a basket of consumer goods and services which are purchased by the households. CPI is calculated by taking the price changes on every item in the basket of goods and averaging them. CPI is the most frequently used statistics for identifying inflation. It is used as an economic indicator. The statistics cover all the people in the country (professionals, self employed, poor, unemployed and retired). But rural population, farm families, armed forces, prisoners and those in mental hospitals are not included. There are two types of CPIs which are reported each time:
- CPI-W: It measures the CPI for urban wage earners and clerical workers.
- CPI-U: It is the CPI for urban consumers.
- The Wholesale Price Index:It is an index that measures and tracks the changes in the price of goods before it reaches the end consumers. WPI report is released monthly to show the average change in price of goods. It is usually expressed in ratios or percentage. It is seen as an indicator of a country's level of inflation.
The Producer Price Index: : It is a group of indexes which calculates and represents the average movement in selling prices from domestic production over a period of time. Also, measures cost from the viewpoint of industries that make the products (seller point of view). PPI is considered as an objective tool for adjusting prices in long term purchasing agreements. PPI is classified into 3 areas:
- Commodity-based final and intermediate demand
We hope that this blog is useful to you in knowing what is meant by inflation and its causes. The most powerful way to protect from inflation is to invest in the stock market. Spend money on long-term investments; investing in different products (like commodities, equity, etc.) can be a good strategy to fight inflation effect at your retirement.