The Truth behind Inflation | Explained by Dhruv Rathee - YouTube

Greetings, friends!

If I gave you a hundred rupee note in the year 1958 and you kept it hidden under your bed for 60 years

And if you took out that note today and used it in the market, then the value of that note

would have reduced to a mere 1 rupee 20 paise in comparison to 1958

Let me explain it to you from another angle, if you did not understand

If you buy something worth 100 rupees today,

it would have cost 1 Rupee 20 paise back in 1958

That is 100 rupees of today is equal to 1 rupee 20 paise of 1958

This is because of inflation

Inflation means dearness of things that makes things costlier for all of us every year

Why does inflation occur and what are the reasons behind this?

Is it really a bad thing?

And how is inflation related to unemployment and other economic factors?

We will talk about all of this in today's video

where I will explain this "ghastly" inflation to you

Come, let us see

First of all, a very important question- Why does inflation happen and who is causing it to happen?

Are some government officials increasing the prices of things arbitrarily?

It is not so

There are several reasons for inflation but I'd like to discuss 4 main reasons for inflation in this video

The first reason is very simple- An economic boom

That is, a good economic growth

When the economic growth is good, then there's more money in the hands of the people who can spend it on different items

When there's more money in the hands of the people, they can spend it on different items

That is, the demand for everything would go up in the economy

When demand goes up, the businesses and companies that manufacture these products seek to increase the prices

in a bid to earn more profit since so many people are willing to buy

So they increase the price of the goods which will then lead to inflation

Explaining this with an example- Imagine an aeroplane with 100 seats

and 100 passengers have to board that plane

But there are only 10 first class seats and 90 economy class seats

Now if the passengers are given more money

If they're all given enough money to be able to afford a first class seat,

they'll all want to book a first class seat. But the number of seats are only 10

Not all of them can have a first class seat

So what would happen as a response?

In response, the airline would hike the prices of its first class seats

so that only those who have more money can afford to book a first class seat

So basically there is an inflation

This type of inflation is called a "demand pull inflation"

A demand pull inflation is when the inflation rises with the rise in demand

The second reason is the increase in the prices of the raw materials due to different reasons

For example, if the prices of wheat and rice rise due to a bad monsoon season,

the prices of oil rise

or a new tax imposed by the government lead to a rise in the price of one of the raw materials

then the companies that manufacture products using these raw materials

they'd have to hike the prices of the products to make profits since manufacturing them would become costlier

which would ultimately lead to inflation

This inflation is called "cost push inflation"

The third reason is increase in the salaries

No, I'm not joking: When the companies or governments raise the salaries of their employees,

then they have to increase the price of their products as well to be able to still make profits

This inflation is called "wage push inflation"

There could be other reasons for this as well

If unemployment levels are at very low levels in a country,

then it is extremely difficult for the companies to replace their employees

and if they aren't replaced, their salaries would have to be raised

and this again, triggers inflation

And finally, the fourth reason is currency depreciation

This can happen due to several different reasons, out of which one of the most important reasons is

printing of more notes by the government which leads to the currency losing its value

And this is a very dicey reason

This could also potentially trigger hyper inflation

which is happening in Venezuela today and happened in Zimbabwe in 2008

If the inflation rate touches even 10% in our country,

then it would cause the people to comment that things are becoming extremely dear very fast

But in Venezuela, between 2016- 2019, the inflation rate was more than 5 crore percent!

Taking the example of Zimbabwe,

Around 2008, the currency of Zimbabwe was losing its value at such a rapid pace

that the government began printing 1 million dollar and 1 billion dollar notes!

And there existed even a 1 trillion dollar note in Zimbabwean dollars

And do you know what the value of that 1 trillion Zimbabwean dollar note was?

Just 1 US dollar!

This is the extent to which money can lose its value in a case of hyper inflation

But this is a very long topic on its own and I will make a video on it in the future

because there are several political reasons behind it, apart from the economic ones

Talking about the present, the inflation rate in most of the countries today is going down

Think about why this is happening

It is because of the shrinking demand in the wake of the lockdowns that have been imposed around the world

People are buying fewer things and travelling less

The people do not have money to spend because their businesses have shut down

And so, there has been a decline in overall demand

And the opposite of the "demand pull"(which I told you about as the first reason) is happening

Since the demand is going down, so is the inflation

As a response to this, some countries have decided to transfer cash to the people- distribute it for free

Now, some people state that doing this would cause the inflation to increase

What do you think will happen?

I discussed the same logic in this video on Universal Basic Income

that the biggest criticism of the Universal Basic Income and the free distribution of money is that

it will cause the inflation to spike

What do you think?

Write down your explanations in the comments below

And I will give the answer to this question later in the video

I'd like to pose another interesting question before you

Is inflation necessary?

What if there was 0% inflation?

Observing superficially, you could think that this would be great as things would stop becoming costlier

and that it is good for you as you will be able to afford it for cheap

You would be able to save up more and overtime, the value of money would not depreciate either

So this would be another great thing!

Analyzing deeply upon the reasons that lead to inflation

then you would understand that 0% inflation is actually not a good thing

This would mean that companies would not raise your salaries

Your salary would remain constant

And since salaries never go down, therefore, in general, inflation always stays in the positive

And there is a third reason as well

If there is deflation, that is, the prices of things keep decreasing every year,

then the people would not want to spend money. They would want to save up

First of all, the value of money is increasing,

If deflation continues to happen, then five years on, the item that one wishes to buy would come for cheaper

So they would want to buy it five years later instead of buying it now

This would cut down the overall public expenditure

Lesser expenditure would mean that the businesses would start incurring losses

The businesses incurring losses would translate to people losing their jobs

which would then cause the unemployment to rise

I've told you about a very long and convoluted connection- You might wonder if it actually happens so

Yes it does

There is a very interesting relation between unemployment and inflation

This graph is called the "Phillips Curve"

This shows us the inverse relation between unemployment and inflation

If there's economic growth, there will be an increase in inflation and unemployment would go down

and unemployment will rise if inflation goes down

And this is a very interesting explanation because one would not expect this to happen, but it does in reality

But as obvious, there are some extreme limits where this graph is not valid

For example, in the case of hyperinflation

It isn't that Venezuela today has 100% employment and 0% unemployment

Some other factors come into play there. For instance, political factors which cause inflation to spike

But generally, this graph is valid

A question arises- Excessive inflation is bad because it would cause hyperinflation and increase dearness

Nominal inflation is also bad because it would cause unemployment to rise

So, what is the optimum level of inflation that a country should maintain?

What could it be?

This figure is 2% for the developed countries

The central banks and the governments of the developed nations have decided that they

should maintain an inflation rate of about 2%

If it is more, then they would try and reduce it

And if it is less, they would try and increase it

For India, this rate is 4% with a margin of ±2%

So the ideal inflation rate in India should be around 2-6%

This keeps the prices stable and keeps the levels of unemployment at their lowest

It ensures maximum employment

So, if a government wants to control inflation, how can it do that?

There can be several ways to do this

Generally, the central bank of a country is responsible for controlling the inflation rate

and normally, the central bank- RBI, in the case of India-

controls the inflation rates by increasing/decreasing its interest rates

If RBI increases it interest rates (which are called repo rates)

which is charged on loans given to other banks

Then fewer banks would want to take loans

And these banks in turn, would increase their interest rates as well

which would reduce the number of people wanting to take loans

This would result in lesser money being circulated in the economy

And if this happens so, then inflation would go down

And if RBI slashes its interest rates,

then indirectly, through other banks, more people would want to take loans

and this would push the inflation up

So inflation rate can mainly be controlled by increasing or decreasing the interest rates

But there are other ways as well- Inflation can also be controlled by printing of more notes

Printing of more notes would obviously cause inflation to rise

The government can control inflation by imposing more taxes

as I had explained in the reasons earlier in this video

The government can also control inflation by spending more or by spending less

As seen in this video, you might've noticed that there is a direct relation between inflation and economic growth

If the economic growth of a country increases, then so would inflation

And if there is a recession in a country and there's no economic growth, then inflation would also decline

This happens on a general basis, but not always

Sometimes, it also happens that a country's economic growth is going down and the country is going into recession

but inflation is going up

This situation is called "Stagflation"

This is a disastrous thing indeed. Why does this happen?

The reason for this is- Assume that there is a recession within a country,

but the cost push factors- the second reason for the rise of inflation that we talked about-

The cost of the raw materials is rising

For example, the rise of oil prices all across the world

so the oil imported would then cost more

so the inflation would rise because of cost push factors

but there is recession within the country

There is another exception from the other side- If there is deflation in a country,

but simultaneously, there is economic growth in the country

This happened in the USA between 1870-1890

This period is referred to as "The Great Deflation"

The cost of the goods were falling by around 2% every year and there was deflation, but

there was also an economic boom

Both the people and the businesses were making more money and employment was on the rise

The reason behind this attributed to the rise in productivity

This was a time when there was technological progress at such a rapid pace

and new technologies were being developed that it compensated for the deflation

Reverting to our original question- if people are given money for free in today's times

during this recession

then would it lead to a rise in inflation?

In my opinion, the answer of this is no.

Inflation would not rise because handing out money wouldn't amount to such a huge increase in wealth

that people become capable to buy things that are not being supplied

It would not be so. Because it would push up the demand very slightly

And demand has fallen so low that giving out paltry sums of money

would not alter the demand drastically

So I do not think that the distribution of money for free would trigger any sort of inflation

No matter how much importance inflation holds for the entire economy,

but if we come down to personal consequences and how it personally affects you,

then you could say that it has a negative consequence

The money that you save up would lose value over time

the prices of the things keep going up and dearness would always be on the rise

This is why people invest their money in different things rather than stashing it under their bed

For example, they buy gold with it. Because the price of gold rises overtime

The value of money keeps diminishing due to inflation but the value of gold keeps rising

Similarly, some people buy real estate/ Property to avoid this

And some people invest in cryptocurrencies like Bitcoin

The best app in India to invest in cryptocurrency is Zebpay

Zebpay is India's largest cryptocurrency exchange platform

It is a very simple and easy to use app

All you need to do is register with your mobile phone number

and you'll easily be able to see in the wallet here how the prices of bitcoins fluctuate

And there are several other crypto currencies here as well

While talking about this, you might wonder about the ban imposed by India on cryptocurrencies

This happened in September 2018

when RBI brought out a circular banning crypto currencies in India

But on 4th March, 2020, the Supreme Court has overturned the decision of RBI by its judgement

and the ban on cryptocurrencies on India has now been lifted

So this can be done legally and openly by everybody again

Both the iOS and the Android link of Zebpay can be found in the description below

and here, I'd like to thank Zebpay for sponsoring this video

There is one other thing that I would like to tell you about cryptocurrencies and inflation

According to my personal observation and my personal opinion,

You might have observed how the people who buy bitcoins today

buy it and merely stash it- they do not spend it

This is the reason why the value of cryptocurrencies keeps increasing over time

because more people want to buy it and stash it- like they do with gold

But people do the opposite with cash because they know that its value will depreciate, and so they spend it

But they do not do this with Bitcoin

This would mean that if the people do not spend the cryptocurrency,

it cannot replace cash in that sense

Its future as an asset is more as compared to its future as a currency

This is my personal opinion here

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and you can write down in the comments below about the financial education topics that you would like a video on

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We will meet again in the next video

Thank you