With the help of this article I want the users to have basic overview about inflation. This article does not contain much analysis, may be in future I would be able to bring some more explanation and examples. Any suggestions are most welcome.
First Question: What is Inflation?
In simple English sudden increase (price hike within less span of time) in the price of goods is called inflation. Deflation is reverse of the inflation.
Understanding inflation
Basic Mathematics behind Inflation:
| Description/ Date | 01-Jan-2011 | 01-May-2011 |
| Total Money (Rupee) in Country [₹] | 10,000 | 15,000 |
| No of Goods available in country | 100 | 100 |
| Price of a good [₹] | 10,000/100 = 100 | 15,000/100 = 150 |
| Within 5 months cost of a good is increased by 50%. See the notes to understand the reasons for increase in total income of the country. | ||
Basic causes of inflation
As a result of imbalance of below two legs inflation is caused/ increased.
Leg1: Income of a significant percentage of population is increased.
i) Because of 5th Pay Commission salary of Government employees is increased.
ii) Government has introduced several new schemes for Un employed village peoples e.g. Narega, various pension schemes etc.
iii) Increase in software work from other countries has made the IT peoples growth very significant.
Leg2: On one hand amount of money in the country is being increased but no of goods e.g. production of food grains, clothes etc has not changed into that respect. This leg also is improved but not in proportion of leg 1.
Nice article.
I have some questions after reading it, which I would like to discuss with you:
Inflation is price hike within less span of time.
My question is how do you define the ‘less span’. Is there any criteria for this.
I am asking this because the Total Money (Rupee) in Country ALWAYS increases, so the population. And goods never increase at same rate.
Once in our country, rice was 5 paisa KG, now its 40 Rs KG. May be we are producing less rice than we were producing sometime back. will it be considered inflation or not.
Also I would like to know that how ‘% inflation’ is calculated.
Inflation is a good subject to be analysed Ashish. the main factor is government printing money. Whenever government announces any charity schemes it uses that a excuse to print money. Printing money(fiat paper) is like pinching money from your pocket with a remote control. You won’t even notice your pocket becoming lighter. Beware the so called deep hearted politicians who spend your money/future money to do charity.