Inflation and Its Factors
Inflation is the general trend in the cost of goods and services. However, it can be distorted by various factors. Whether there is a demand for products or a supply, consumers can be hit by higher prices in either direction. As a result, policymakers often focus on "core" inflation, which excludes volatile energy and food prices. These two components of inflation are not representative of the long-term trend, and thus are often not considered by economists. Most people in developing countries, especially poorer individuals, spend a large percentage of their household budget on energy and food, which are commodities that are hard to substitute. Moreover, poor people are not likely to own real estate, which traditionally served as an inflation hedge.
Demand-pull Inflation
When aggregate demand exceeds supply, inflation rises. During a period of rising real GDP and falling unemployment, the economy moves along the Phillips curve. This is often described as too much money chasing too few goods. If this is true in the United States, we may be experiencing a period of demand-pull inflation. However, it is important to note that demand-pull inflation is not necessarily a cause for concern.
Cost-push Inflation
Cost-push inflation is a type of inflation that is caused by the rising costs of important goods and services. As a result, businesses are forced to raise the prices of their outputs. Cost-push inflation is a difficult form of inflation to control, because it is not a sustainable form of growth. To combat the problem, a number of measures must be taken. Here are three of the most common methods for tackling the problem:
- Built-in inflation
- Effects on investors
- India's inflation rate
- Measures of inflation
Built-in Inflation
Built-in inflation is a common phenomenon that affects all sectors and individuals of an economy. When the cost of making a good goes up, a company may increase its price to keep up with rising costs. This increases the cost of the goods being produced, and increases the demand for higher wages. The higher wages increase the cost of finished products, which triggers cost-pull inflation. This cycle of increased spending feeds on itself, leading to an increasing price level.
Effects on Investors
Increasing inflation is a major concern for investors as it reduces the purchasing power of investments. Rising inflation can prompt officials to slow down expansionary activities or reduce the money supply. This can lead to an increase in interest rates, which can cause some investors to place their funds in interest-linked accounts. Investors should consider the risk profile and appetite before investing in these types of accounts. Rising inflation can have negative effects on the earnings and valuations of companies.
India's Inflation Rate
The latest inflation figures from India have been released, and they are more positive than negative. The country's inflation rate rose 7.1% in June, just above the 7% target economists had projected. The inflation rate is calculated by adding up the changes in the prices of a basket of goods and services that consumers typically buy, such as groceries, clothes, rent, power, and telecommunications. The inflation rate also takes into account federal fees and other costs.
Measures of Inflation
There are several ways to calculate inflation in a country. Some are more reliable than others. Using alternative measures can help policymakers better understand the underlying causes of inflation and identify the causes of unexpected spikes and drops. The components of an inflation index are made up of two types of driving forces: a common trend and idiosyncratic components. It is important to disentangle these two types of driving forces in order to better understand inflation trends.
