What is Inflation?
Inflation refers to the rise in prices of goods and services across the entire economy, causing a gradual decline in consumers' purchasing power. This means that your rupee doesn't go as far as it once did. The inflation rate is calculated based on the average price increase of a chosen basket of goods and services over a year. High inflation indicates rapid price increases, while low inflation means prices are rising more slowly.
Inflation Impact on Indian Consumers
Inflation can be a real burden for Indian consumers, especially those on fixed incomes. Here's how it hits their wallets:
Reduced Purchasing Power: The main victim of inflation is purchasing power, as it reduces over time. As prices rise, the same amount of money buys you less. This means consumers have to cut back on their spending or switch to cheaper alternatives.
Impact on Essentials: Inflation often hits essential items like food and fuel harder, disproportionately affecting low-income families who spend a larger share of their income on these necessities. This can lead to tough choices between buying enough food or essential utilities.
Shifting Consumption Habits: Surveys show a rise in price checking and a shift towards budget-friendly options. People might buy less, opt for private labels, or even forego non-essential purchases altogether.
Dampened Growth: When consumers tighten their belts, discretionary spending suffers. This can hurt businesses and slow down economic growth, impacting job creation and further straining household budgets.
However, there's a positive outlook: Recent data (May 2024) shows some relief, with inflation dipping to 4.75%. The expectation is for a further decline in the coming quarters.
What Causes Inflation
Inflation is a complex economic phenomenon influenced by various factors. Here’s a concise explanation of the main causes:
Demand-Pull Inflation: This occurs when the overall demand for goods and services in an economy outpaces the economy’s ability to produce them, leading to higher prices.
Cost-Push Inflation: This type of inflation happens when the costs of production increase (such as raw materials and wages), causing producers to raise prices to maintain profit margins.
Built-In Inflation: Also known as wage-price inflation, it results from a previous rise in prices, leading to a rise in wages, which then leads to further increases in prices as companies pass on the higher labor costs to consumers.
Monetary Inflation: An increase in the money supply can also lead to inflation if it outstrips economic growth, as more money chasing the same amount of goods can push prices up.
Supply Shocks: Events that suddenly change the supply of a commodity or service can also cause inflation. For example, a sudden increase in oil prices can lead to higher transport and production costs across many industries.
Expectations of Inflation: If people expect prices to rise, they are more likely to spend now rather than later, increasing demand and contributing to inflation. Similarly, if businesses expect costs to rise, they may increase prices in advance, creating a self-fulfilling prophecy.
These are some of the primary drivers of inflation, and often, a combination of these factors leads to an overall increase in price levels within an economy.