What is the definition of inflation?
It is a market condition in economics where the purchasing potential of individuals goes on decreasing and the price of commodities goes on increasing. The cost of living in a country is affected due to it. It can also be taken positively. Hoarding the money through savings will be lowered and more focus will be given on expenditure. The smooth running of the economy is operated by the central government of India. It is responsible for measuring the inflation rate and operate the market accordingly. Wholesale Price Index and the Consumer Price Index are the two main parameters for measuring inflation.
Will inflation affect savings and investments?
Inflation reduces the purchasing power of money. The same amount of money used now to purchase the product may not be adequate to purchase after 20 years. The interest earned through savings may be enough to neutralize the inflation effect. But of excessive inflation arrives, the bank will increase the rate of interest also.
There are different types of investments and each has a different effect of inflation.
- Annual returning investment: Bank deposit certificates, regular bonds, etc fall under this category. The same interest is obtained from the investment each year. Now due to inflation, there is a gradual cut in the earning. Hence these investments suffer a huge loss during inflation. The purchasing power of the money earned will go on decreasing.
- Stocks: There is a mixed impact of inflation when it comes to stocks. The performance of the company plays a key role in the positive or negative impact of inflation on the company. With the greater sales volume, the share prices of the company will be increased. But in this case, they have expense more for raw materials and wags. It will somehow affect the financial condition of the company.
- Precious metals: Gold especially gives enough earning during high inflation. The investors find it a better option than mutual funds. As the number of money decreases, the gold can be purchased with the same amount of money. Hence the future-growth investment opportunity of gold is very bright.
- Inflation-indexed investments: When inflation is more, they give more earning. When inflation is slower, their earning also decreases. Hence the total annual earning is fixed. It is facilitated by some bonds and annuities. But they require some additional cost for its operation.
What is the effect of inflation on the following people?
- Salaried and wage-earner: The rate of increase in wage or salary is much lower than the rate of increase in price. Hence this sector is badly affected due to inflation. They earn a fixed income every month and now they are not able to make both ends meet as the purchasing power of money has gone down.
- Profit earner, Black marketeers, and speculators: As the price of products increases with time, they get bigger profits. The businessman increases the price of the product since the raw material is also costly. Hence the profit share id also bigger and better.
Is it possible to plan for inflation?
Inflation is such a force of the global market that is unavoidable at any cost. People don’t want to continue their savings accounts during inflation. The monetary value of the savings will go on decreasing. Stocks or mutual funds give more earning than the inflation rate. The investors also avoid investing in bonds and fixed annuities. Rather they prefer putting money in gold and inflation-indexed investments. Hence it is very important to plan for inflation because the actual value of the asset will be obtained only after the inflation is bad or good. On should always think of putting money in higher-growth investment options. It is essential to plan for inflation thoroughly.
A little does of inflation is beneficial for the economy according to economists like around 2% to 2.5%. It goes higher when the country is facing a recession. Recession helps to keep the rate of interest at a slower pace for a prolonged time when inflation hits. Too much of anything is harmful and inflation is not an exception. With the tremendous increase in inflation, the return on investment will be devastated. The public accounts will get nothing from the savings. People should focus on spending rather than saving to prevent the condition of excess inflation. Hence there should be an optimum range of inflation.
The following article reveals that inflation is a common economic phenomenon that the world faces on a global scale. It has negative features, but the policymakers can give an extra effort to minimize these effects. With time, the monetary value again becomes stable and everything becomes normal. Though the government plays a key role in tackling inflation by installing several strategies policies, inflation itself is a boon for the central government. The huge debt that the government incurs from foreign investments is getting eroded due to inflation. Thus the income of the government is rising due to inflation from this point of view.
Author: Nancy Kapoor