The petrol you are purchasing today (25 Nov 2021) with INR101per litre (in Bhubaneswar, India) was 36 rupees in 2004. Not only in petrol, look around you, almost every good and service you use today is higher price value than past. How ? Well, the answer is inflation.
What is inflation? And why is it happening ?
By definition inflation is simply "The decline of purchasing power of currency."
There are lots of reason for inflation but, the root cause is increasing of money supply by the monetary authorities, we will discuss this in more detail blow in concept of hyperinflation. Other factors which triggers the inflation are discussed below
Types of inflation
1. Demand pull inflation
When people have more money they would like spend more, at the same time it will stimulate the overall demand for goods and services it would more than the economy's production capacity which will lead to inflation. More demand with limited resource causes high inflation
2. Cost push inflation
Cost push inflation happens when :-
(i)the price of raw material increases
(ii) tax increases or a new tax imposed by Government (iii) increasing price of oil like petrol and diesel
The manufacturer which create the product using these factors will affect by it and in order to maintain the profit they will increase the price of the product, this is how cost push inflation occurs.
3. Wages / built-in inflation
When employee of an organisation or an individual worker experiences that the price of goods and services are increasing and, they will continue to increase they will demand high wage in order to maintain their standard of living which will result to increase the price of product or service offered by the organisation which causes inflation.
Hyperinflation
It's a kind of situation when everybody has tons of money and price of goods and services touches to the sky as well. It is a very scary situation, in the history of hyperinflation it was seen that children were playing with bundles of cash like Lego. This condition arises when inflation rises so rapidly. Imagine the price of coffee 5000 next month 1,00,000.
Now the question is why this happens? Excessive money supply is the root cause of hyperinflation. In 2008 - 2009 Zimbabwe had experienced hyperinflation, at that time they had printed even a trillion Zimbabwean dollar.
Video
How to calculate inflation rate?
To calculate the percentage of inflation rate, simply divide the final CPI by the initial CPI and then multiply by 100. Whereas CPI is the Consumer Price Index.
Inflation percent rate = (final CPI / initial CPI)*100
Can it be controlled?
Yes, inflation can be controlled by Government. Government can reduce the inflation by contractionary monetary policies.
Reducing the money supply/ printing less money,
increasing the interest rate and
reserving money.
Is inflation good or bad for an economy?
Too much inflation is obviously bad because it triggers the hyperinflation and already have discussed how dangerous it could be but, zero inflation or very low inflation is also harmful because it will put business into loss which will create obstacle in economy growth. So economists suggests maintaining a moderate inflation.
