Although inflation is a part of normal economic development of any country, but any increase in inflation above a pre-determined level is a cause of concern.
The rise in cost or prices of goods and services, which results in reduction of purchasing power of people is called inflation. Although inflation is a part of normal economic development of any country, but any increase in inflation above a pre-determined level is a cause of concern. Inflation occurs when there is a mismatch between supply and demand of goods. As the purchasing power of consumers increases the demand increase as well, but the supply is limited which results in price hike. Population explosion also creates an imbalance between supply and demand which further causes inflation.
Inflation makes the wealthiest people richer and masses poor. During natural calamities like flood and earthquakes, the production of goods and services decreases considerably which further limits the supply part and hence causes price rise. When the cost of raw materials increases it enhances the manufacturing cost which in turn increases the price of particular good. Therefore, production is the only answer to inflation.
The increase in the price of fuel results in price hike of goods as any change in price of fuel immediately impacts price of food items, since most of them are dependent on transport. Inflation in short, is too much money chasing. Increases in money supply are what constitute inflation and a general rise in prices in the symptom.
High level of inflation leads to bad effects on economic performance of the country. It adds pressure on the central bank to raise rates even though there is slow growth in the country’s economy, thus high inflation and rising interest rates slow down the economy.
Inflation also affects investment as higher long-term inflation adversely affects growth and investment. High inflation increases the cost of credit and input cost of companies by excessively increasing their spending on raw materials and wages. Nothing so weakens the government as inflation.
Sumaiya Momin Mallah