What is Inflation ? 🔔

Inflation is the increase in the market value/ price of goods and services. In simple words, when you buy something (like water, cloths, house, petrol, internet service, etc.) it becomes more expensive/costly than before. This thing/phenomenon is inflation.

• For example –
  • In 2025 the MRP of a 100g packet of cookies is Rs.10. 👇
  • In 2026, the same packet of cookies with the same weight has an MRP of Rs.12. This increase in the price is due to inflation. (If the price of the pack of cookies remains the same, then one should check for the decrease in the weight of the pack. The price may be the same, but the amount of ingredients must have decreased)
• If the coaching fees of the same standard have increased than those of the previous year, this indicates to us the inflation in the services. As teaching is a service and inflation is the general increase in the prices of goods and services.
  

It can be caused by many economic factors. Demand and supply are the central aspects of the inflation. When demand for a product rises, but the supply remains the same, then the price of that product rises.

Types of inflation –

• 1. Demand pull inflation – 🤩🤑🎉💸
  • When the demand exceeds the supply in an economy.
  • Due to excess demand for the goods, the cost of such goods also rises as the production remains the same as before. The reason behind the excess demand might be the excess money in hand with the people.
  • Excess demand creates shortage, which allows the producers to increase the prices of their products.
  • This same thing/logic applies to the service sector. The more demanding services get higher pays. An AI expert will get more money than a coder nowadays!
    • A specialist doctor will charge a higher fee than a general surgeon, because their services have a higher demand.
  • Teachers teaching artificial intelligence are in demand, so their fees/pay will automatically increase.
  • This type of inflation is caused by the demand side.

• 2. Cost-push inflation – 🏭👩‍💼
  • When the cost of production increases, the businesses transfer such cost on to the customers. The businesses do not compromise their profits but increase the price of their product to maintain the profit margins.
  • Due to such increase in the prices, we experience the cost push inflation. Meaning, the inflation is caused by the increase in the total cost of making a particular product.
  • This type of inflation is caused by the supply side.

• 3. Built in inflation (wage price spiral) – 👨🏻‍🌾🏭👩‍💼
  • Due to the increased cost of living, workers are demanding higher salaries from management. To increase the salaries of the workers, management has decided to increase the profit by increasing the prices of production.
  • This cycle of higher salaries and higher prices creates inflation.
    

Inflation is not only the general increase in the prices of goods and services but also the devaluation of the currency.

• For example –
  • In 2020, one used to buy 1 kg of sugar for Rs. 30, but the amount of money, i.e., Rs. 30, in 2025, you cannot buy the same amount and quality of sugar. Meaning, you can buy less sugar with Rs. 30 after 5 years because the value of money has decreased.
• Such depreciation in the value of currency also causes inflation.
  

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Also read – IMF Inflation article.