Inflation and Deflation for India
We all know one tings never stay the same –prices. When general
prices increase in an economy the rate at which they increase is termed as
inflation. This rate of inflation pushes down the purchasing power of people.
To put it in monetary terms if inflation rate is 9 percent, a shopping basket
full of goods that costs Rs. 100 will cost 109 a year onward. A measure that
helps identify inflation rate in the country is Consumer Price Index (CPI).
CPI presents a weighted average of prices of a basket of
goods which includes goods for domestic use, transportation and medical care.
It is the most prevailing used indicator for assessing the cost of living in an
economy. Heavy ascent of CPI in short time implies inflation while vice versa
signals deflation.
While inflation pushes down purchasing power of citizens
deflation does the same. It is a common fallacy to consider whatever that moves
opposite of what is bad must be good, though inflation and deflation are forces
in opposite direction, both when unleashed can pull the economy in a vicious
spiral.
To understand deflation let’s look at the current trends in
international oil prices. Oil production which was primarily a Middle East phenomenon
has equally gained momentum in the U.S., Latin American nations and elsewhere.
This has resulted in massive supply in oil. This has coupled with decreasing demand for
oil majorly due to lowering of China’s consumption given its shrinking growth
rate. These circumstances have led to lower revenues for oil producing nations
with eventual under recovery of oil production costs.
In an economy experiencing deflation or heavy drop in
prices, interest rates drop due to low demand for money, there is lower rate of
return on investments, investments fall, people start losing their jobs, demand
for goods go down, production shrinks, and the overall economy goes into a
spiral resulting in massive contraction.
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