Thread by @myfinology

Is inflation always bad for the economy? 🤔

Let's find out in this thread ⤵️

Inflation is viewed as a warning sign of a suffering economy by some, while it is viewed as a sign of a thriving economy by others.

But what does it actually mean? ⤵️

Mostly the term "inflation" is used to characterize the economic impact of rising oil or food prices.🛢️📈

If the price of oil rises from $75 to $100 per barrel, input prices for a factory would rise, as well the transportation expenses which will affect the final goods.

Buy why does it increase?

2 main reasons: supply and demand.

- When consumer demand for goods/services increases so much that it outstrips supply

-When there is a supply shortage combined with enough demand to allow the producer to raise prices.

When is inflation good ?

Moderate inflation is a sign of a healthy economy. When consumers expect prices to ⬆️ in the future, they want to buy goods now.

This ⬆️ demand encourage the producers to invest more in plants, hire more labour & leads to a virtuous cycle of growth.

Why it is considered bad for the economy?

Daily wage earners, pensioners, salaried, receive a fixed income.

Inflation diminishes these people's purchasing power, which reduces overall demand in the economy.

High inflation

If inflation continues to rise over an extended period of time, it is called as hyperinflation.

It has the worst impact on consumers & economy. High prices of day-to-day goods make it difficult for consumers to afford even the basic necessities.

It also affects businesses. Manufacturers see the prices of key inputs, like oil or raw materials rise and they try to pass on these costs to consumers, but could be limited in their ability to do so.

As a result, they may have to cut back production, go for lay offs.

Eg: Zimbabwe has previously suffered substantial hyperinflation. Every day, prices in Zimbabwe roughly doubled, with goods/services costing 2x as much the next day.

Due to this Zimbabwean dollar had eroded to the point that it had to be replaced with various foreign currencies.

Why is low inflation bad?

Low inflation typically indicates that demand for products and services is lower than it should be, affecting economic growth and salaries of employees.

It also leads to Deflation, falling prices.

When prices are decreasing, consumers will delay purchases.

Eg: why will buy a new washing machine today if you could wait a few months to get it cheaper?

Deflation also discourages lending because of lower interest rates.

This may even trigger a recession, resulting in higher unemployment, as we witnessed during the Great Recession a decade ago.

Eg : Japan

From 1991 to 2001, Japan went through a period of economic stagnation known as Japan's Lost Decade.

While the Japanese economy grew in this period, it did so at a far lower rate than other developed countries.

India's current situation :

Over the last few months, inflation has emerged as a major concern with retail inflation for march jumped to a 17-month high of 6.95%.

Prices of almost all essential items are ⬆️ and thereby forcing the individuals to reconsider their budget.

How to deal with inflation?

- Investing in shares can be an excellent method to prevent inflation. Companies that can increase their goods/services prices during inflationary periods are some of the greatest stocks to hold.

#gold #stock

- Historically, real estate has performed well during inflationary periods.

- One can also invest money in gold to protect money from inflation.

Explore our recommendation for a inflation proof investment portfolio at Recipe.finology.in