Why are prices going up? Understanding Inflation in simple terms

 Inflation- A word we often listen everywhere, from news headlines to conversations about rising bills but what does inflation really mean, and why do prices seem to keep climbing. Is it good for us or has a detrimental effect? In this post we shall breakdown inflation in simple terms, uncover the reasons behind rising prices.

 What is inflation? 

According to Shapiro, "Inflation is persistent and appreciable rise in the general price level"

According to Coulbourn, " Inflation is the stage of too much money chasing too few goods."

In simple words, Inflation is the persistent rise in prices of goods and services. 

Demand pull and Cost Push inflation 

 Demand pull Inflation:- A situation in which aggregate demand at existing price level far exceeds aggregate supply of goods and services.such inflation arises due to excessive demand.main reasons for excessive demand can be rapidly growing population, rising money, income, rising, black money, expansion of money supply deficit financing, et cetera

Cost Push Inflation:- cost, push inflation is caused due to increase in cost of products. Increase in cost may be due to increase in the cost of Raw material or other inputs. It can also be because of increase in wages without increase in productivity of labour. Another reason for increase in inflation could be increased in indirect costs and taxesthis type of inflation is also called supply-side of inflation. Cost push inflation is more difficult to be controlled in comparison to demand pull inflation.to cut down pages will be strongly opposed by the labour unions.

Too much money chasing few goods

Inflation is a situation in which money supply rises but it is not followed by increase in the production of goods and services. Therefore aggregate supply of goods and services is less than the aggregate demand because of which prices rise. This can be due to warlike situation where most of the productive resources are directed towards manufacturing  goods and less attention is paid to the consumers goods. Even after the war ends, the tendency of inflation continues. This is because firstly government has to spend large amounts on the repair and reconstruction of damage to property is like bridges, railway lines, shapes, Machine etc Secondly, taxes levied during the emergency period of war are abolished and loans taken from public are paid. Consequently, money supply increases, but the production of goods and services does not increase in the same proportion, thus prices continue to rise even after the war. In case of underdeveloped countries, large resources are needed for the economic planning and development programmes. In order to mobilise resources, government has to resort to deficit financing.This leads to increase in money supply and consequently rise in price. This is also known as peacetime inflation.

How does inflation affect our daily life?

Inflation impacts are daily life in various ways, as prices rise the same amount of money can purchase fewer amount of goods and services. For example, Rs.100 few years back had the purchasing power to purchase 20 pens now the same hundred rupees has the purchasing power to purchase 10 pens of the same company. In this way, inflation affects a daily expenses people might adjust their spending pattern prioritising essentials over discretionary items. 

Excessive rise in prices adversely affects the standard of living of low and middle income group daily wage earners and fixed salary groups are worst hit by inflation. 

Is Inflation always bad?

The question arises that is inflation always considered bad for the economy and has detrimental effects on the economy? Well, surprisingly, the answer is no. Increasing prices to a certain generally 2 to 3% is considered healthy for the economy. Persistent decline in prices known as deflation can certainly satisfying for the consumers in the short run but has detrimental macro economic effects. Falling prices reduces profits.which results in lower wages and thus leads to unemployment. Their food inflation is not always bad. Moderate inflation is normal and even beneficial, but very high or uncontrolled inflation can be damaging, what matters is how much why and how fast prices are rising.