What is Inflation?

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Two-three years back I was with my friends at a multiplex (Not a branded multiplex, only a local one) in Bandra, India and my friends were chit-chatting about a number of important things (Which celebrities had break-up, which had new affair, how good that actress looked in a film poster, etc.!!! How can these be so important in any one’s life except for those celebrities and their families? I wonder). The words in their chit-chatting voices just flew in through one ear and out through another when suddenly some started poking my brain. That was my friend Darshan who was telling about his father’s childhood stories. His father used to bunk classes and come to the same multiplex that we were in, few decades back to watch movies. Guess what the cost of the ticket was at that time. It was just 4-5 INR (Approximately 0.112 USD)! The same ticket was bought by us that day with 120 INR (Approximately 2.8 USD)!

This rise in the price of ticket is what we can call effect of inflation or this rise in price is largely due to inflation. We can’t say that these are the only reason for increase of prices is inflation; there are other reasons as well, like technological changes, etc. Over a period of time, due to the economic changes of countries, the money that we have will decrease in value. Of course, it doesn’t mean that your $100 reduced over a period of time to $70. Your $100 will remain as it is, but to purchase a thing that cost $100 today, you will need more money after few years. This is what inflation is. The purchasing power of your money reduces over time.

Inflation is specified in percentages for a specific period of time like a  week, month, a year, etc. For example, if one says that inflation for the year 2009-2010 was 3% that means $100 of last year has purchasing power of only $97 this year. In other words, something that we would have purchased a year back for $100 cost $103 today. So we had to shell out $3 more due to inflation. Inflation is calculated with the help of CPI (Consumer Price Index) or WPI (Wholesale Price Index). Many countries use CPI some use WPI. But both ways, it keeps track of the many consumer products (Product Basket) and the cost of each over time. Based on this chart, an index for each year is calculated. Inflation percentage is calculated cased on these index values.

The next question you will have, I am sure, is: Why the hell this happens? Our modern economy is a very large system with very complex structures and of course, flaws. Economists are found debating on this very topic again and again but no one has been ever able to come up with some good theory that everyone can accept and say that ‘Yeah, these are the exact reasons of inflation’. Some theories and causes are Demand-Pull inflation, Cost-push inflation, excess printing of money by government during crises, national debts, drop in exchange rates, etc. Most of these are inter-related though.

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