In this article, we’ll break down what inflation is, why it happens, how it impacts your finances, and strategies to protect your money from its effects.
What is Inflation?
Inflation is the rate at which the general level of prices for goods and services rises over a period, reducing the purchasing power of money. This means that over time, the same amount of money buys fewer goods and services than before.
For example, if the inflation rate is 5% per year, something that costs ₹1,000 today will cost ₹1,050 next year if everything else remains constant.
Inflation is usually measured using indices such as:
✔ Consumer Price Index (CPI): Measures the average price change for a basket of consumer goods and services.
✔ Wholesale Price Index (WPI): Tracks the price of goods at the wholesale level before they reach consumers.
Causes of Inflation
Inflation can be caused by several factors, including:
- Demand-Pull Inflation
Occurs when demand for goods and services exceeds supply, pushing prices higher.
🔹 Example: Increased consumer spending due to higher wages or government stimulus programs. - Cost-Push Inflation
Happens when production costs (such as wages and raw materials) rise, leading businesses to increase prices.
🔹 Example: A sudden rise in oil prices increases transportation costs, making goods more expensive. - Monetary Inflation