Friday, 20 November 2009

Inflation & Deflation: Its casue and effect on our daily li

INFLATION :  We are very much familiar with the word Inflation in our daily lives. Every day we hear many more things about “INFLATION” which are being discussed by the economists or experts.
In common man’s word “INFLATION” means upward movement of price of Goods and services resulting reduction in borrowing capacity. In other way round “ In inflation every thing gets more valuable except money”.
Inflation Calculation: In India we follow WIP (Wholesale price Index – which is the measurement tool to evaluate the fluctuation of goods traded in wholesale market ) to calculate Inflation rate. There are around 435 different commodities which are being tracked by WIP to calculate present  Inflation rate. This Index is followed on Weekly basis .
There is also another way of calculating Inflation which is called “Consumer Price Index” or “Cost of living Index”.
Cause:   Inflation happened if availability of goods is less than the current demand in market or if too much money floats into the economy. This can also happen due to defective monetary or Fiscal policy.
Effects:  The effects of Inflation can is linked with many other complicated things but for an avg people this means
  • Increase in price of necessary commodity & Food grain
  • Price of Money goes down compare to dollar, resulting fluctuation of prices of goods traded in Export & Import market.
Measures taken by Govt during Inflation: The most common & effective measures taken by Govt  during Inflation are
  • Increase  in  Bank Interest rate to control liquidity in the market.
  • Increase in supply of Goods & services for balancing demand & supply.
  • Have effective control on prices of necessary commodities which are created by hoarders.
DEFLATION  :  “DEFLATION” is just the opposite of inflation which apparently means decrease in commodity price. That means this is good for common people………….Is this a true statement??
The answer is “NO” ,If we dig dipper the effect of deflation is totaly reverse. Though Deflation is rare in nature but when it strikes, it causes destruction all around with falling demand, sluggish investment and mostly through widespread unemployment.
Cause : If price falls persist for long ,it would cause falling profits of Cos resulting closing down of factories , fewer jobs and increasing no of default in Loans.
Effects :  Effects of “Deflation” is like a situation after a Tornedo blows in a city. It can paralyse an economy if not controlled on time. It can be well assumed from some of the below mentioned points.
  • Fall in asset Prices like House, Consumer Goods and Infrastructural materials.
  • Investment like Equity, Mutual Funds etc will lose value
  • Cut down of employee Salaries to reduce cost
  • Unemployment will rise on top as a result of sluggish Demand.
  • Factories will close down due to fall in demand, increasing overhead costs etc.
Measures taken by Govt during Deflation : Following are the key measures taken by Govt in case of rising “DEFLATION”
  • Reduce in lending Rates.
  • Bring in more liquidity in the market by Reducing CRR (Cash Reserve ratio) and SLR (Statutory Liquidity Ratio).
  • Providing financial or non-financial aid to worst effect Industries.
  • Take effective measures to protect Banking Sector from collapse.

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