I am sure many of you have heard about Inflation and deflation on TV, in Newspapers and many other places. But do you know what they mean, its cause and effect on our daily life? If not, let’s learn about Inflation, Deflation, and its Cause and Effect in daily life.
Inflation & Deflation: Its purpose and impact on our everyday life
What is Inflation, how is it calculated, cause and effect
We are very much familiar with the word Inflation in our daily lives. Every day we hear many more things about “INFLATION,” which are being discussed by economists or experts.
In common man’s word, “INFLATION” means an upward movement of the price of goods and services, resulting reduction in borrowing capacity. In another way round, during inflation, everything gets more valuable except money.
In India, we follow the WIP (Wholesale Price Index), which is the measurement tool to evaluate the fluctuation of goods traded in the wholesale market) to calculate the Inflation rate. There are more than 435 different commodities that are being tracked by WIP to calculate the present Inflation rate. This Index is followed every week.
There is also another way of calculating Inflation, which is called the Consumer Price Index or Cost of living Index.
Cause if Inflation
Inflation occurs when the availability of goods is less than the current demand in the market. Another reason is there is too much money floats into the economy. It can also occur due to defective monetary or Fiscal policy.
Effects of inflation
The results of Inflation can is linked with many other complicated things, but for an avg people this means
- Increase in price of necessary commodity & Foodgrain
- The amount of money goes down compared to the dollar, resulting in fluctuation of prices of goods traded in the Export & Import market.
Measures by Govt during Inflation
The most common & useful actions taken by Govt during Inflation are
- Increase in Bank Interest rate to control liquidity in the market.
- Increase the supply of Goods & services. It balances demand & supply.
- Have effective control over the prices of necessary commodities that are created by hoarders.
What is deflation, how is it calculated, cause and effect
Deflation is just the opposite of inflation, which means a decrease in commodity prices. That means this is good for ordinary people. But is this an accurate statement?
The answer is No. If we dig dipper, the effect of deflation is reverse. Though Deflation is rare in nature when it strikes, it causes destruction all around with falling demand, sluggish investment, and mostly through widespread unemployment.
Cause of deflation
If price falls persist for long, it will cause falling profits of Cos, resulting in closing down factories, fewer jobs, and increasing no default in Loans.
Effects of deflation
Effects of Deflation is like a situation after a Tornado blows in a city. It can paralyze an economy if not controlled on time. It can be well assumed from some of the below-mentioned points.
- Fall in asset Prices like House, Consumer Goods, and Infrastructural materials.
- An investment like Equity, Mutual Funds, etc. will lose value
- Cut down of employee Salaries to reduce cost
- Unemployment will rise on top as a result of sluggish Demand.
- Factories will close down due to falling in demand, increasing overhead costs, etc.
Measures by Govt during Deflation
- Reduce in lending Rates.
- Bring in more liquidity in the market by Reducing CRR (Cash Reserve ratio) and SLR (Statutory Liquidity Ratio).
- Provide financial or non-financial aid to worst effect Industries.
- Take effective measures to protect the Banking Sector from collapse.
We hope it was easy to understand the Inflation Deflation and its Cause and Effect. If you still have questions, do let us know in the comments.