Inflation and Price: Destined To Intertwine
Oil is an integral part of an economy. In effect, even a slight increase in its rate sends the prices of everything that is transports sky rocketing and this wave effect further leads to Inflation.
What is Inflation
Inflation is generally believed to be the overall increase in the prices of the entire range of goods and services that comprise the economy. However, inflation actually means the physical increase of the currency in circulation and an increase in price levels is a normal outcome of it as the currency depreciates, lowering its purchasing power. This means the currency loses its purchasing capacity. This happens when demand for goods and services is high and supplies are insufficient to meet them, in which case prices begin to rise.
Prices and inflation
Sometimes, even when inflation rates are low, market prices do not follow suit immediately. There can be a number of reasons for low inflation: it may be due to a decline in consumption and hence lower demand, low industrial output, fall in the prices of industrial commodities such as crude and steel, and industrial slowdowns. Low Inflation is a phenomenon when the prices of goods and services do not increase rapidly.
Inflation and the average man
Market prices for the common man, on the other hand, are not determined by such factors. This is because if supply outpaces demand, industries can slow down their output, driving prices higher. During periods of low inflation, the Reserve Bank of India reduces interest rates and lending rates which results in excess liquidity in the market. Unscrupulous traders often use such excess money to speculate on stocks and real estate to create artificial scarcity, increasing prices or preventing them from moderating.
Hence, inflation is an economic fact of life and will always remain in the economy to impact everybody’s lives. Prices usually do not moderate once they begin rising and inflation will not affect a common man as long as he is able to maintain a reasonable standard of living.