Inflation – A Fair Weather Friend

Inflation is a one-word tale that has got the best of the best economists twisted in a good knot. Its Janus-faced nature has got people scratching their heads in search of answers to the question - is inflation a fair-weather friend? Be it a billionaire or someone that is trying to make ends meet, inflation affects everybody. That is why the government monitors it scrupulously. 

Inflation is a term used in economics, to indicate the generally rising prices of goods and services within a particular economy. The periods of inflation or deflation are measured using a popular statistic called Consumer Price Index or CPI. CPI is defined as a measure that determines the weighted average of prices of a basket of commodities. It is estimated by considering the change in the price of each item in the predetermined basket of goods and averaging them. 

Let's look deeper into why the rise and fall of inflation have been one of the most contested topics in economics. Through the course of this blog, we'll look at what inflation means, its causes and effects, and what too much or too little of it could do to any global economy.

What Is Inflation?

Inflation is defined as a general increase in prices and a fall in the purchasing value of money. This means that if it cost you $5 to go to the movies in the 1990s, you will now have to shell out $15 in 2020. This surge in price is the effect of inflation. 

The inflation rate is defined as an overall increase in the Consumer Price Index (CPI), which is a weighted average of prices for different goods. In layperson's words, the inflation rate is the rate at which inflation rises or falls. 

What Causes Inflation?

Financial experts have sought to find the causes of inflation.  They have found that an increase in money supply faster than the growth in real output, causes inflation. Simply put, the money supply is the total money circulating within a particular economy. The reason this happens is that, with an increase in the money supply, there is more money chasing the same amount of goods.

Inflation also has an impact on the national debt, and exchange rates. In fact, inflation makes it easier for the government to pay off a national debt as they now have a higher reserve. However, in the case of exchange rates, an increase in an exchange rate results in slower growth of real GDP. 

Experts have coined two theories explaining the causes of inflation; Demand-Pull Inflation and Cost-Push Inflation (National debt, money supply, exchange rate).

Demand-Pull Inflation: 

When the number of goods and services demanded far outweighs the supply of them, it is called demand-pull inflation. Producers are unable to meet the swell in demand, and so, compensate by increasing the price of the goods and services that they offer. This forces people to spend more money, having a positive impact on the economy. With an increase in salaries and wages, there is more money being circulated in the economy as people tend to better their lifestyles. That means buying better quality goods, which again, results in spending more money. In due time, this causes inflation. 

Cost-Push Inflation: 

This is when the cost of businesses rises and is forsworn on to consumers. There are several reasons why this could happen, one of which is the cost of raw materials. The cost of crude oil, for instance, could increase exponentially as a result of progression in countries. An increase in wages is an added reason that causes cost-pull inflation. Businesses then compensate for this increase in cost, by relinquishing it to their customers. Ultimately, this too yields an increase in inflation.

Why Is Inflation Important?

Although inflation may sound like an economy's worst nightmare, an optimum amount of it has proven to not only be required but also welcomed. Experts have deduced the optimum range of inflation to be between 2-2.5%.

Case 1 - China:  

A country that has held fairly appreciable inflation rates is China with 2%, 1.56% and 2.1% in the years 2016, 2017 and 2018, respectively, representing growth and a blossoming economy. What separates China from other countries is that the government, instead of the market, sets the interest rates.  By setting the cost of money artificially low, on both loans and deposits, the government transfers the wealth from borrowers to savers. What also works for China is its monetary policy. As it gets looser for producers, it simultaneously gets tighter for consumers. China is also considered to be the manufacturing hub of the world - meaning lots of exports. All of these factors have contributed to giving China an appreciable inflation rate.

Some may argue that the lower the inflation, the better it is for the economy. That argument fails to hold. Zero or very low percentages of inflation indicate a stagnancy in the growth of the country.  On the other hand, too high inflation rates have served to be ruinous to many global economies. A country that proves that statement like a theorem is Venezuela. 

Case 2 - Venezuela:  

Venezuela's economy crumbled around the year 2017 and is not doing very well on the recovery front. With the sky-rocketing inflation of 438.12% (as of 2017), when compared to previous years, Venezuelans struggle to put food on their table.  The country's debt peaked, the Venezuelan bolivar started to lose its value and people started hoarding which led to an increase in prices, hyperinflation and, eventually, the collapse of the economy. The inflation has continued to swell through an unfathomable measure and reached a jaw-dropping 9585.5% (as of December 2019)

How Can You Fight The Effects of Inflation?

  • Invest in long-term returns: Shelling out money on investments that yield long-term returns can aid greatly in combating inflation. As the date of maturity nears, the inflation rate will have less of a blow if you are prepared with some money in reserve. 
  • Saving is everything: Save, save and save. You will need money for when retirement strikes. And the truth is, it will probably be a lot more than you have roughly anticipated.  To keep up your current lifestyle or augment it, without an active source of income, is no joke. This is when your savings come into the picture. Make sure you keep enough money stashed aside for a comfortable retirement lifestyle. 
  • Invest in real estate, art and precious metals: Investments of these sorts come in handy when life throws you a curveball. Real estate can be an active source of income. Putting up your house on rent can fetch you a good sum of money every month. Investing in painting, sculptures and exotic art prove to be good assets and can yield large sums of money when sold. Precious metals, like gold and silver, also give fairly large sums of money when sold in the market. Investing in precious metals is considered a strategic investment as it has positive returns on investment. 

Inflation has been studied by countless experts over the years, most of whom round it up accurately. As we conclude, we have dug deeper into what inflation means, CPI as a measure to estimate inflation, causes of inflation, its significance, and lastly, measures you can take in fighting the effects of inflation. Milton Friedman famously said, "Inflation is the one form of taxation that can be imposed without any legislation".

Do you think inflation is merely a fair-weather friend?

37 responses to “Inflation – A Fair Weather Friend”

  1. Atool Sinha says:

    The article provides clarity on the concept of inflation in a simple and crisp manner. It also suggests measures best suited to overcome the friendly evil.

  2. Hema Narasimha says:

    Well written!

  3. Mukta says:

    Very well written and comprehensible. Finally understood what happened to the Venezuelan economy.

  4. Nirupama Dutta says:

    For a person with a non-economic background, the write up was educative and set me thinking. Yes, inflation as a form of taxation, is definitely a friend and not only a fair weather one.

  5. Anita Alves says:

    Very well articulated Divyushii👍. Well done🙌

  6. Dr Vincent Paul says:

    Divyushi”s inflation is well written and interesting.

  7. DC says:

    Well expressed.

  8. Pulak Mukherjee says:

    Very crisp and well written notes on inflation a part of economy for the layman to understand.

  9. Gulshan Oza says:

    Nice study and analysis . Good article for study for students of economics

  10. Priyanka Chandani says:

    Well researched..

  11. Mira sinha. says:

    Wealthfare is explained in a very simple and selfexplanatory words.
    Well done.

  12. Rachana says:

    Well explained without any jargons…. Good read…

  13. Piyusha Anand says:

    Very informative and insightful article

  14. Piyusha Anand says:

    Very insightful article

  15. Col Suhas Jatkar says:

    How nicely and lucidly explained.Very nice

  16. Anuja Prabhu says:

    Very well written..good analysis

  17. Dr Nameeta Asthana Saxena says:

    Very well explained in simple words. Very informative. Keep it up and God bless

  18. Mukund says:

    Simple and easy to understand… without any economists jargons… thanks

  19. Sudhir Rane says:

    Superbly written…the simplicity and clarity in elaborating on the concept of Inflation is outstanding.

  20. Sushil das says:

    Thanks, for bringing clarity on this relevant aspect to our daily lives, when we discuss, “how expensive have things become”.

  21. Dhiraj says:

    I think the article is well written and explains the basics of the phenomenon of inflation, something that we all non-experience but seldom comprehend. 👍🏼

  22. Himkar Srivastava says:

    Well written.
    Explains inflation in simple terms. The inadequacy of CPI over time due to changing consumption patterns, requiring a change in the weightage of the items in the basket, or a change in the items in the CPI basket could also have been covered

  23. Sudhanshu Kamboj says:

    Simply written article that explains inflation without complicated jargon words and good examples.
    Sometimes simplicity is key to understanding the most important factor of economics and you have just done that.
    Wishing you the best. Keep blogging 👍😎

  24. Shamsul Siddiqui says:

    A complex topic put forth in a very simplified manner with adequate illustrations. Shows the depth of knowledge… Kudos

  25. Ashwin says:

    Well & concisely written…. keep it up

  26. Abhaya says:

    A very simple explanation to a complicated topic! Well written!

  27. Chetan Desai says:

    Extremely informative and insightful article that explains the concept well without getting muddied in jargon. Very well written piece.

  28. Vivek says:

    I like the simplicity of the explanation of a loosely understood concept that impacts us everyday!

  29. Satchit Hasabnis says:

    Well written, easily understoodable by even a layman.

  30. Col Ashok Jadhav says:

    I like, the perspective, the method of putting across your views in a simple way .I don’t mind reading such or even better scripts in future. God blees you and to your inspiration. regards.

  31. Brig Dinesh Gupta says:

    Clear thought process and very well described for a lay person. God Bless

  32. Prabhadevi says:

    Well worded, good study

  33. Saakshi says:

    Pertinent info. Very well explained using simple and understandable words.

  34. Gita Sinha says:

    Well written Divyushi! Clear explanation of a difficult concept. Your true life examples brought clarity and relevance to the concept of inflation. Look forward to reading more blogs.

  35. […] their prices. The lack of imported product alternatives forces consumers to pay more, resulting in inflation and excessive profits for local firms. This development usually acts as a prelude to workers' […]

  36. Divija says:

    Amazing written

  37. Divija says:


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