What is an Inflation?
Inflation is a sustained rise in overall price levels. Moderate inflation is associated with economic growth, while high inflation can signal an overheated economy.
As an economy grows, businesses and consumers spend more money on goods and services. In the growth stage of an economic cycle, demand typically outstrips the supply of goods, and producers can raise their prices. As a result, the rate of inflation increases. If economic growth accelerates very rapidly, demand grows even faster and producers raise prices continually. A fast moving upward prices, sometimes also called “runaway inflation” or “hyperinflation,” could also occur.
During inflation, money loses value over time. It’s happens on a constant basis – things become more expensive than they were a few years ago.
To see it happening, think about what you could buy with Rs 1,000 over the past few years.
We’ll look at it in terms of household items:
2010: Rs 1,000 = 5 Kg basket of items
2015: Rs 1,000 = 3 Kg basket of items
2020: Rs 1,000 = 2 Kg basket of items
2021: Rs 1,000 = 1.5 Kg basket of items
So, Rs 1,000 could buy much less now than it could in 2010 and in another ten years it would buy even less. This is due to inflation. This also reflects the “purchasing power” of money.
Rising inflation reduces purchasing power of money.