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‘Inflation’ - a strain on the purchasing power of your money

‘Inflation’ - a strain on the purchasing power of your money

Last year on her birthday you promised your daughter to gift her a nice smart phone during on her next birthday. That time you checked the price and found that a nice smart phone will cost around TZS. 1.5 million, and you started saving the said amount.

Come this year, her birthday is just clocking and you are happy because during the period you were able to save TZS. 1.5 million for the promised gift. Just a day before her birthday you went to buy the smart phone and got the shock of your life when the Shopkeeper told you the phone will cost you TZS. 1.7 million, and not TZS. 1.5 million which you saved.

You are confused as to what changed from last year to this year which has reduced the purchasing power of your money. Something which was worth TZS. 1.5 million last year is not selling at TZS. 1.7 million. This is where the silent killer of your money needs an introduction.

Please take it easy as the above anomaly has been caused by an economic virus called – ‘Inflation’. In simple economic terms – ‘Inflation is a rise in general level of prices of goods and services in an economy over a period of time’. When the price level rises, as an effect each unit of a currency buys fewer goods and services.

This is exactly what I was trying to explain through the above stated example wherein purchasing power of TZS. 1.5 million got reduced in one year.

 

In an economy though there could be many factors which may contribute towards the high rates of inflation or hyperinflation, however one of the prime reasons among them is - the ‘excessive growth of money supply’.

When in a country the money supply grows at a faster pace comparative to the rate of economic growth, it provides an easy fuel to the inflationary powers.

From a common man’s perspective, it is important to understand that the task of checking inflationary conditions in a country is normally vested with the Central Bank. Time and again such monitoring authorities take various measures as they deem fit & proper in order to effectively control the pace of inflation in an economy.

Further it is experienced that a consistent increase in inflation normally leads to the shortage of essential goods in a country, as under these circumstances some greedy traders, and consumers begin hoarding of goods.

This is done in expectation that the prices of commodities will further increase in the days to come. Such unwarranted behaviour on the part of some irresponsible traders/ consumers adds fuel to the fire by contributing towards an unrealistic increase in the prices rather than to their containment.

While on the subject I will be unfair to this concept if I fail to highlight some positive impacts of inflation. One of the notable benefits in a rising inflationary environment is on the ‘debt relief’, as debtors with a fixed rate of interest will experience a reduction in the ‘real’ interest rate as the inflation rate rises.

At one point in time the Nobel Prize winning economist - James Tobin even argued that a moderate level of inflation can increase investment in an economy leading to the faster growth or at least a higher steady state level of income. This is due to the fact that inflation lowers the return on monetary assets relative to real assets, such as physical capital.

Globally, the generally accepted indicators to measure inflation are – Wholesale Price Index [WPI] or Consumer Price Index [CPI], Personal Consumption Expenditure Price Index [PCEPI], and GDP Deflator etc. The Consumer Price Index [CPI] in a country measures prices of a selection of goods and services as purchased by a representing class of consumers.    

I am sure by this time you must be convinced to believe that ‘Inflation’ is an unavoidable evil in our day-to-day life. But not to worry much, as its impact can be controlled if not completed erased out by remaining vigilant and informative about this menace called inflation. Moreover one important lesson which can be learned from this concept is that – ‘do not keep your money idle in a cabinet rather invest it into an instrument of your choice’.

Additionally, always remain updated on the prevailing rate of inflation and try hard to look for investment opportunities which at least could mitigate the impact of inflation if not completely beat or outperform it. So plan your investment strategy such that it can outperform the prevailing inflation rate.

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Author: Jagjit Singh

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