Inflation is commonly understood as a situation of considerable and quick general increase in price of the currency. The price of indices which is measure of rating inflation reveals the course of inflation and deflation of economy.
Inflation is statistically measured in % increase in price index and rates it over a period of time usually a year or a month.
Inflation rises because of rise in the price of the imported goods/commodities like oil, gold, fuel, etc..
Effects of Inflation:
Middle class family will suffer because the prices of goods which are required for normal life will rise faster than their annual income of family.
Inflation will affect the value of investment for the people who earn from investment business as it doesn't return sufficient value for what we will pay now.
In inflation (money) currency loses its value so businessmen and investors will not willing to invest because in long- term scenario it will not return anything in comparison of today's investment which affects productivity of nation.
It will cause rapid economic slow- down.
Types of inflation:
Moderate Inflation:
When prices rise by less than 10% (single digit inflation rate) per annum, running inflation occurs.
Its stable inflation and not serious for the economy because it doesn't interrupt the economic balance.
People's expectations and needs will not get change more or maybe will stay stable.
Money's value will not get affected so it'll work as investor. Interest rate is NOT LOW in this inflation.
There are 2 types of moderate inflation……
Creeping Inflation:
When price don't rise by more than 3% it is called creeping inflation. It is the mildest form of Inflation.
Walking Inflation:
When price rate is more than creeping inflation is known as walking inflation. Rise rate will be between 3% to 10%.
Running Inflation:
When the movement of prices speed up very fast in market that emerge running inflation.
Running inflation may record more than 100% rise in a decade.
It means prices rise more than 10% a year it means running inflation.
Galloping Inflation:
If prices rise by double or triple digit inflation rate is called Galloping Inflation.
When prices rise more than 20% and less than 1000% that is called Galloping Inflation.
It is also called JUMPING INFLATION.
India is facing it since 2nd 5 year plan.
It is a serious problem and causes economic twist and disturbance.
Causes of Inflation:
Demand pull Inflation-
Demand is continuously rising and supply is unchanged or same.
People are ready to pay for satisfying their needs.
Cost-push Inflation-
Supply of goods and some services are stopped for some reasons
Demand remains unchanged and cost is pushed generated by the factors.
It will increase the cost of production and prices of services also.
It can be a result of ineffective govt.'s fiscal policy.
There can be too many monopolies in market which can materialize Inflation.
Lack of balance in the country's budget for which they increase the taxes and prices of goods which led to depreciation of money.
Calculation of Inflation:
3 ways for calculating Inflation:
CPI- Customer Price Index
WPI- Wholesale Price Index
PPI- Product Price Index
Trend of inflation since 1991-2012:
In 1990-91 India faced running inflation as inflation rate was 12.1% which is double digit inflation.
Till 1995-96 India went through RUNNING Inflation and came to creeping Inflation when Inflation rate became 5%.
In 2002 Inflation rate was lowest at rate 1.6% and in 2004 it again rose and became 7.7%.
In 2006 again rate was average 5.76%. In 2008 Inflation was there because of hike in prices of primary goods like oil, gas, food. India faced FOOD Inflation in 2008 as India is the major importer country of food.
The Inflation rate from 2008 to 2009 was -0.34%. (Negative rate implies that people's purchasing power increases but there is lack of supply.)
In 2010 rate increased by 1.64% and in 2011 it was 3.16%.
In 2012 it's approx 1.4% (till July).
Correlation between Gold Price, Crude oil and Dollar:
Relationship of gold price, crude oil and dollar………….
Increase in oil prices affects the countries who are leading in oil exporting like Middle East countries as well as importing countries of crude oil.
Global resource of crude oil is getting empty at the rate of 6% while demand is increasing at the rate of 2%.
As we saw Inflation rate is increasing every month so it's clear that low rate crude oil is next to impossible to get now so impact of oil on gold & dollar.
Till 1971 central banks of all countries were allowing people to convert dollar into gold. People used to buy dollar for gold but now this system is removed from economy so oil producing countries converted dollar into gold.
It simply shows that whenever crude oil prices went high inflation rate was affected. All countries make transactions in mediate of DOLLAR. So when gold price go high crude oil will get affected and its price will go high.
When dollar's exchange rate in compare to domestic currency goes high domestic currency's value will fall so primary needed things' price will go high which will affect lower middle class people of the society. Unemployment will rise.
Relationship between gold and dollar:
Gold and dollar both are global currency. Gold price and dollar price both are inversely related.
When dollar's exchange rate falls people will not prefer to buy gold at that time as it needs more dollars to buy and when exchange rate becomes high people will willing to buy it as that time have to pay less dollars.
Dollar's weakness always turns into gold's strength in long term scenario and in short- term scenario dollar and gold price both can fall or rise together. So this can be called strategic relationship.
At the time of Inflation people prefer to buy gold which makes gold's demand high and price high as supply is greater than demand which led to Inflation.
Relationship between crude oil and dollar:
Oil purchases are paid in dollars. And demand is dependednt on the domestic price of country which always fluctuate with chnages in dollar. So dollar depreciation reduces the oil price in domestic currancy.
Depriciation of dollar causes an increase in oil demand and reduction in supply. Dollar depreciation can result in oil supply reduction.
