Layman’s Inflation

In the recent times one question which people don’t stop asking is the reason for the rise in prices across the market.The question is quite intriguing and i have wondered a lot about it. Although the reasons are necessary but i found the implications all the more interesting.  Lets discover them using a thought experiment (which i think is the best means, considering my trivial knowledge in the subject ).

Assume this hypothetical scenario, today the prices of commodities are normal (and affordable) and suddenly tomorrow the rate of every article increases ten-folds (uniform inflation).  Now comes the interesting part. A person holding a 1000 rupees today, is still holding 1000 rupees tomorrow but in effect he will be able to buy only a tenth of what he could have bought today. This is equivalent to him having 100 rupees today (OMG!). What we have seen just now is a serious depreciation of the currency. The person unknowingly has been robbed of a staggering 90% of his total cash (yeah, a bigger OMG!).  Now where did this money go? Logically and obviously to the Government. If the person  buy gold today and sells it tomorrow he loses nothing as gold value tomorrow would be ten times todays. Hence we discover that keeping money in the form of a resource rather than hard cash is helpful. Although the above scenario is almost impossible ,but it expresses the longtime effect of constant inflation. To be simpler, in reality the ten-fold increase is happening over several decades, but it is happening.

This was about your money, what about a borrowed sum. Consider a person takes a loan from a bank for a long-term. Over the years the value of the loan taken reduces as it is in the form of cash.The value of interest will be even lesser over the years. Hence in a way the borrower gets the advantage of inflation. The banks  increases the interest rates to curb this advantage(as usual). This is the reason for high interest rates.(Banks and corporate are always smarter).

The above implications can easily be deduced by anyone but it is not all the very obvious. Inflation effects everyone but it should not be regarded as harmful. In fact economists maintain that a constant small inflation level is good for the economy.

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4 thoughts on “Layman’s Inflation

  1. A very interesting article. Consider this situation- If you buy a property now, its land value increases let us say atleast 10 times in 10 years. Then by your theory of inflation, the price of money would also have become 10 times. So you have 100 times the value of what you initially invested 10 years ago. If land value increases say 20 times then the value you get is 200 times. So you’ll be making a lot more profit by buying land. Am I correct in saying this?

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