Inflation - Types and Causes - YouTube

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Namashkar, my name is Mukul, and welcome to Asset Yogi

Friends, today we are going to discuss a very important topic and that is Inflation

Inflation means expensiveness

Now why this topic is so important?

Because it impacts most of the people

Even the poorest people face the impact of inflation

And rich people, whether a businessman, also faces an increase in the cost

which ultimately results in a loss in business

And because it impacts almost everyone, the government closely monitor it.

You might have seen that the BJP government collapsed in the past

when the inflation was very much increased even the price of onions reached Rs.70-80 per kg

At that time the BJP government collapsed and I am not talking about today

May be Rs.70-80 per kg is not much for you but I am talking about 20 years before

So why does inflation increases?

We'll see in this video

And what should be the target for people like you and me to avoid inflation

What type of inflation is feasible for the economy?

Many economists believe that inflation is necessary for the growth

So we'll be discussing what does RBI and the Government do to make a balance between inflation and growth

So stay tuned with this video, let's switch to the blackboard

Let me give some examples

In 1947, when India got independence, the cost of 1-litre cow milk was Rs.0.12

In 1975, its cost was Rs.2.5 and in today's date, i.e in 2019, it costs around Rs.46

Similarly, in 1947, the cost of 1-litre petrol was Rs.0.27, in 1975, the cost was around Rs.1.7

And in 2019, it costs Rs.68 and I am talking about Delhi

Also, in 1947, the cost of 1 cinema ticket was Rs.0.3, in 1975, it was Rs.3

And in 2019, it costs around Rs.250-300 on an average

So you can clearly see that inflation increased very much in these years

So if we talk about the definition of inflation

It is an increase in the general price level of goods and services

That means the overall rise in prices of goods and services is called inflation

If the price of any one thing increases in any one year, we'll not call it inflation

The overall price levels should increase, only then we can call it inflation

And Deflation is the exact opposite of this

It is a decrease in the general price level of goods and services

So for example, if the price of 1 litre cow milk decreases from Rs.46 to Rs.45 in 2020

If petrol prices decrease to Rs.66 and the cinema tickets decrease to Rs.280 on an average

And if the value of all the essential commodities decreases, then we'll call it deflation

But as we saw the trend from 1947 to 2019, the prices continuously increased and hence, the inflation increased

And as we saw in the definition that it is a general increase in price

With that, the purchasing power of the currency decreases

The value of an Rs.100 note that was there in 1947, is not the same as in 2019

Let's understand this with an example

In 1975, the value of 10 grams of gold was Rs.500

Whereas, in 2019, the value of 10 grams gold is Rs.33,000

In 1975, if you would have bought gold worth Rs.50,000 then how much gold would you have bought?

Round 1 kg gold in 1975

But in 2019, if you have the same Rs.50,000

Then you can buy only 15 grams of gold

So you can understand the comparison that Rs.100 in 1975 is not the same as Rs.100 in 2019

So you can understand the meaning of inflation through both ways

1. The price increased and

2. The power of the currency decreased

So we understood the concept of inflation. Now let's understand why it happens?

The first reason is Cost Push Inflation which can also be called supply shock

As we discussed earlier, it's all about demand and supply

The price decided for any commodity or goods is based on supply and demand

If demand increases for anything, the price increases, let me mark the price by double arrow

And if supply decreases, then also price increases

Price is marked with a double arrow

So how can anyone get a supply shock?

Manufacturing of anything requires raw material

There's labour cost, there's real estate cost

These are the 3 main costs required

If the cost of the raw material increases, for example, if oil prices increase

No government can do anything about that because it depends on the international market

If the prices of any raw material increase, or the cost of labour increases

If there are very less number of people available in a particular technology, then their cost can increase

The cost of real estate can increase in a particular city

So all these increments have to be adjusted by increasing the cost of the product

If there's a pizza manufacturer/restaurant,

Then all these increments will lead to an increase in price for the consumers

So if the cost of 1 pizza was Rs.400 and let's say 10% cost increased on all these things

Then maybe the restaurant start selling it for Rs.450

Or maybe they keep the price same but decrease the size of the pizza

So you might have seen that some companies decrease the size of their products

So you get less for the same money

Another reason for inflation is Demand Pull Inflation

We already discussed supply, the other is demand

If people have more money but the goods are limited, then also inflation increases

How can people have more money?

Let's say anyone was earning Rs.20,000 and suddenly that person starts earning Rs.30,000

Then it's natural that person will try to spend that extra money and hence, inflation will increase

But how can that person can suddenly start earning Rs.30,000 instead of Rs.20,000

There may be different reasons for that, maybe the government decrease the tax rate

Or decrease the interest rate and when the interest rates will decrease, people will borrow more loans

And when people will borrow more loans, the cash flow and the earnings will increase and

As you saw the salary increases under pay commission

Definitely, you would say that only the government wages increase under pay commission

But it's not true. Competition is equal for all

If the government increases the wages, the private sector also increases the wages

Otherwise, they will not get the manpower. So the overall wages increase

So maybe a person who was getting a salary of Rs.20,000, is now getting Rs.30,000

So broadly, if you receive more money, you'll spend more

People will buy more real estate properties, more vehicles, the demand for essential commodities will increase

If people have more money, but the supply is the same/limited,

Then it's natural that prices will increase, and demand pull inflation also increases inflation

The 3rd reason is government policies

What does that mean?

More money chasing fewer goods and how this more money will be generated in the economy

Maybe, the government start printing more money

So let's say if earlier, Rs.10 lakh crore was the printed currency and suddenly the government prints Rs.12 lakh crore currency

Then where will this 20% go? It will also come into the economy

So if more money will chase the limited goods, inflation will increase.

Maybe the government start taking more debt to increase the spending in the infrastructure

They can issue government bonds, can take loans from international agencies

Then also, the money comes into the economy

RBI can reduce the requirements of the banks. What types of requirements?

Like Cash Reserve Ratio, Statutory Liquidity Ratio, Repo Rate and Reverse Repo Rate

If the requirements decrease, then banks receive more money and they can give more money for loans

And as we saw earlier, more loans means more spending

And if the supply is limited and money is more, then the prices will increase

How does inflation impact you?

See, if your income growth is more than inflation, then you may be naturally happy

Let's say your salary was Rs.20,000 and next year, it increases to Rs.22,000

That means got 10% income growth

And if the inflation rate is 7%, then there are all the reasons for you to be happy because you beat inflation

But if your income growth is equal to inflation

Let's say your income growth is 7% and the same is the inflation

Then neither it's a matter of being happy nor being sad/worried

But if your income growth is less than inflation

Inflation is 7% and your income growth is only 4%

Then it's not a matter of being happy because inflation is higher

So your target should be to come in the first bracket and your income growth should be more than inflation

You should always upgrade your skills so that your income growth should be always more than inflation

So we understood what is inflation and what are the reasons for it

And what is the impact of inflation on people like you and me

Now a question arises what is the healthy rate of inflation?

Many economists consider 2-3% annual inflation rate as a healthy rate

In which economy can grow in a healthy way

If I talk about India, since we are a developing economy, so 3-4% inflation rate can be considered healthy

But if it goes 9, 10, or 12%, then it's not only a matter of concern for us but for the government also

So the question is that if inflation can be controlled, then is it easy?

I would say it's not because it depends on many factors

We saw that on how many factors it depends

It depends on the cost of raw material

You and I cannot decide the oil prices, it is an international price and depends on many factors

Similarly, it depends on the exchange rate, whether the economy is growing fast or slow or there can be a recession

Whether the interest rates are high or low, how is the supply of raw material or the government is in more debt

So it's not at all easy to control these many factors

Definitely, government and RBI has some tools about which we already discussed

Like CRR (Cash Reserve Ratio), SLR (Statutory Liquidity Ratio)

Or Repo Rate, Reverse Repo Rate

So loans in the market, how much money can government print can be controlled

But definitely, there are some factors that are not even in control of the government

That's why it is important to know about inflation

And our target should be to beat inflation by our income growth

Or our investments should at least beat inflation

That means, if the inflation rate is 7%, then our skillset should be so much updated that our income grow by 10-15%

So I hope the concept of Inflation is clear to you after watching this video

We'll go into more depth in the next video

We'll talk about the calculation of inflation in India, so watch that video

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So we'll meet in another informative video

Till then keep learning, keep earning and stay happy as always