What is inflation? | How does inflation bother you?

 

Inflation, which has troubled us all, if we talk about inflation, then it is at a high of nine years. Talking about retail inflation, it is at an eight-year high. Almost every product has become very expensive now and not only this. Now even RBI has started increasing the rates and can increase further. After increasing the repo rate from RBI, there are 20 more such global central banks that are increasing their rates.

What is this inflation and how does it bother you:

Earlier many things were available at the same price. Last week last year last month and now he met at some other price and usually the price of things goes up. Very few well-planned increases of two days, but most of the prices increase and whether it is food items, mobiles, cars, whatever it is, compared to last year, last month, last week, things compared to last day not getting much and the more expensive you get, it is called inflation, or generally the increase in the price of anything.

The first reason is demand, the increase in inflation in such a way, which increased the demand, the demand was increased, due to which the lifestyle of the people has been changed, the way of living changed, so that the demand again increases. Or as the population is increasing in a country, the demand for food and drink is increasing. As development is happening in any country.

People are getting more money to spend, then demand will be increased. For example, if highways are built in the country to have very good roads, the demand for cars will increase. If people like us are stuck in traffic everywhere, then people avoid driving cars. As the infrastructure grows. So the demand for its related product increases, then one by one the demand for any product increases, and as the demand increases and then its prices increase. 

Inflation is that which comes from increasing demand. There is no doubt that inflation is the reason for the increase in demand. there was a time, A lot of us used to buy Fiat. For exactly two years, it was available only in white color. Now you see the lifestyle of these people, even people have a place for the car. There is also a place to live, money is also there, so their demand increases. The production of many useful things is down. Because of that, the demand is increasing month by month, we take it to the supply side. 

Suppose, you had produced 1 lakh tones of wheat last year? This year there has been a drought, then the wheat production has been 80 thousand tones. There were floods many times, and many times droughts, so these conditions have affected the production of tea and coffee. The production of sugar cane production is more this year, so many times why this demand is not as high as the demand. It's not that much of a difference, but your supply will be less. 

Suppose that, there was a strike in some factories, so the production has been stopped. If there was a flood of rain in one of the cities and production stopped. For example, the conflict going on between Russia and Ukraine affects the supply of many things. Suddenly the price of crude oil increased. Gas prices went up, commodity prices went up. It is not a freight container for carrying it by supply or as such from one country to another. If there is no ship then this is called supply-side inflation.

The demand may be a little too high and in the short run, the demand would also increase. When lockdown was happened in our country, then people were keeping all necessary things. People used to buy after long long lines. Sometimes think that artificial demand would increase for use, usually when due to some reason, then it would seem that all the supplies are left at such a time.

The supply of something of a product seems to be decreasing and its demand remains. Due to the price of that product increased, the inflation also increased, and on the supply side strengthened the demand in two ways. On the other hand, the supply is low. But sometimes both of them get together then it's a very bad situation. which is what we faced nowadays.

Is it necessary to increase the interest rate of the central bank only to stop it, or is there some other way? 

Now let's talk about increasing the interest rate in this condition. Even if RBI does it, then this concept should be explained to everyone if inflation increases, then why does the bank increase the interest rate? But the interest is too big what to do. RBI or Federal Reserve, whichever is an equivalent central bank, belongs to all different countries. Their interest rate will increase as in the system.

There is less liquidity from the system and money flows out. The money supply is low, they try to reduce money. The more the system in which money is more purchasing power or buying power of the people than first thing which tries to reduce the liquidity and second things when interest rates increase, then interest rates increase makes two things per difference between people.

The spending capacity has increased. Apart from this, for example, I have to buy a home. What a good job I am doing. But I should have to take the home loan. So now if I think that I have to collect as much money as I want to take home and collect it. But I have to purchase a home form the basis of future earnings. If it is costing me 6% on interest and 12 times as big, how big is the difference, and what would have happened when interest rates increased, would affect the spending capacity of the people.

If the market increases by doing both sides, then the capacity will decrease. If you want to take a small loan from a friend, then it is available without interest, but unlimited is not available. If we get loans to every person at low-interest rates, then the Reserve Bank or any central bank tries to control the spending capacity of the people by increasing the interest rates, even at their will.

After that, if the interest rate is increasing then it should be believed that inflation will decrease. To a large extent, there are two or three reasons for this. One is that the more interest you supply, the more money the money supply will decrease. The interest is so low, the money in the system is more like others,  if I will bring in a big interest rate, then people will take fewer loans. Because if you have to repay, then you will get more EMI for that loan.

If inflation increases more than that, then you feel like spending it because you will not have any shortage. But if the interest increases, then there are chances of increasing your earnings in fixing the market. If the market increases even on the increasing deposits, then there is also a reason that the constant spending factor from the investment side, these are all things that increase in interest rates, then it is because of inflation.

Usually, you will take a home loan, take a loan for a car, take a loan for your business. But what to take from my daily consumption, if I am buying bread, pulses, rice, or vegetable sugar, then the rates will increase here. Is it's inflation will be less. Let's assume that by increasing the interest rates, the price of your flour and pulses are the basic things of the companies, which had increased the price of flour on the first day, then would you eat less two pieces of bread.

Generally food and drink prices are not increasing by raising interest rates, then even if you have ever raised interest rates, the main purpose of RBI is control the inflation. it is not for daily food and drink. To control the inflation of food and drink, supply side will issued. If the MSP is seen increasing every year, then if the MSP will increase, then the price of wheat and pulses will increase, then let that price go to the government.

If the demand for wheat is increasing a lot from outside, then the government has banned exports, so there are many ways to control the supply. If wheat is getting more then it should be stored. The daily cost is not less, for example, if you go in auto then don’t want to go by foot. If you go in five stars hotels, then can go in fine dining to control your level or cost.

Repo Rate and CRR(Cash Reserve Ratio): 

Repo rate means the interest rate that when the central bank takes a loan from RBI, it gives it at the repo rate. Its reverse rate, if I have money and you want, I will give it at this rate. When the bank gives its deposit money to RBI, then the rate at which RB takes it under this reverse repo rate.

RBI says that every bank should keep some part as cash, like government securities, and liquidity types. Suppose that you have  100 rupees assets, in that you have to keep 25 in cash, then you have only 75 rupees, the more you increase the CRR, the more banks will be able to give less loan, and the more you increase the repo rate, then it will be more expensive for the bank to take a loan. People will ask for a loan, will less purchasing, and will take fewer loans. So RBI has only these two things to control inflation.

If inflation rises then the value of the rupee goes down in the market. Therefore, to control it, the interest rate is increased. If the rupee is weak then the import will be expensive but the exporter wants the rupee to be weak, but RBI wants the rupee will remain strong. If demand is strong, inflation will come under control due to an increase in interest, but if inflation is increasing due to supply, then there will be no effect.

Increasing interest rate affect on fixed deposit and employment:

When the interest rates increase, the people who invest money in FD in fixed income will think the same to Earn more interest. Due to an increase in interest, the fixed deposit returns also increase, if you increase the rate of the loan, then the bank has to apply the rule in the deposit as well. That's why FD returns increase.

If the interest rate increases, then any company will think about whether to set up a new plant or not. If the company drops its plan to start a new business, then how long will people get employment? So the effect of increasing the interest rate falls on the jobs. Therefore, it is the job of the central bank to create a balance between both of them.

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