Budget Explainer - Inflation

Inflation is the hot topic of the moment but do you know what it is?

Well, inflation is the rate at which the prices of goods and services rise in an economy. This rise is often expressed as a percentage and means that the same unit of money now buys less of an item than it did in the previous period. 

For instance, let’s say that a kg of rice costed ₹50. But after a year, in which the economy witnessed inflation, the same kg of rice now costs ₹60 and you get effectively less rice for ₹50 than you did last year. That’s nothing but inflation for you!

But, why does inflation happen?

1. The Drivers of Inflation

There are three main reasons which cause inflation in an economy. It happens when:

1. A product witnesses more demand and less supply
2. Production and distribution costs increase
3. There is an imbalance in the supply and demand of money

But the thing is, inflation isn’t always a bad thing.

2. When Inflation Is Positive For The Economy

Just like food and exercise and pretty much everything else in life, inflation too is at its best when present in a moderate range. In the range of 2%-3%, inflation allows the economy to be energized. How, you ask? 

Well, mild inflation makes consumers think that the prices will continue going up. And of course people don’t want to spend more money later on so they buy products now. This increases the demand, which increases the supply and more than likely increases the job production in a virtuous cycle of economic growth.

Then how does it become the villain?

3. When Inflation Is Negative For The Economy

When inflation rates move above the level of 2%-3%, problems arise. People’s purchasing power goes down and so does the value of their savings in the long run. Workers believe prices will keep moving upwards and demand higher wages, ultimately leading to recession. 

Now that’s all about inflation but if you like this content and want to learn more about the Union Budget, just follow Upstox!