Vilifying Inflation is favourite past time for Personal Finance geeks. Inflation helps in instilling fear in minds of people. The idea of pennilessness rings alarm bells in the minds of people. Inflation also helps in selling mutual funds. But the trend of vilifying inflation always crosses its Laxman Rekha. This crossing is the main problematic thing. In reality, inflation is the fire that cooks as well as burns.

The concept of Money and Inflation:

In a monetary system, there is money and goods. When more money chases fewer goods, the price of goods increases.  This is called as an inflationary condition. The exact opposite of more goods and less money is called as the deflationary condition. In inflationary conditions, the producer will be happy as he gets more price for his produce. In deflationary condition, the consumer will be happy as he gets commodity at lower prices. Since the currencies we use are all fiat currencies, they are created out of thin air.

The process of creating money out of thin air is the function of the central bank i.e. RBI in India. RBI licences this operation to  Banks. A party taking a debt finances every economic expansion. The debt funds economic expansion plans of the debtor. More lending puts more money into the system, thereby increasing inflation. In essence, its central bank which plays the inflation dance.

Vilifying inflation:

The general populace hates inflation as the games are assigned to a group of experts, not them. Inflation also raises the price of goods, thereby reducing the value of money a person holds.  Inflation rates vary from individual to individual. The inflation rates vary from person to person because the basket of goods being consumed varies. A person invests to overcome this inflation.

A person normally doesn’t keep a tab on his earning source. For that reason, he sees inflation as a negative influence. The primordial nature of vilifying inflation is for that reason only. When we realize the earnings growth is the product of inflation, then only we can appreciate it.

Why we should stop cribbing about inflation:

  • A person is always a part of the producer and consumer groups. Hence some inflation is necessary to drive the system.
  • Deflation disincentivizes the producer, thereby hitting the very employment scenario. England faced this during the Napoleonic War.
  • deflation and inflation are mutually exclusive and keep the other in check. A person can influence inflation outlook.
  • The inflation drives the interest rates on savings, as well as corporate profitability.
  • A person as consumer sits on the demand side of the equation. More investments and less spending cause inflation to drop.
  • A person as an entrepreneur/employee sits on the supply side of the equation. Glutting the market causes inflation to drop. Hoarding makes inflation to rise, which eventually affects the demand.
  • The assets too have their own inflationary tendencies. The demand drives it.
  • When people decide about each aspect of governance and inflation, its called as Anarchy. Inflation management happens well when left to experts.
  • Between demand and supply, inflation is influenced more by demand. You control the demand.