Inflation is the decline in the purchasing power of a currency over time. A quantitative estimate of the rate at which purchasing power declines may be reflected in an increase in the average price level of a basket of selected goods and services in an economy over a period of time. Inflation measures how much more expensive a set of goods and services has become over a given period of time, usually a year. Inflation affects all aspects of the economy, from consumer spending, business investment and employment rates to government programs, tax policies and interest rates. Understanding inflation is important to investing because inflation can reduce the value of investment returns.

Inflation also affects the cost of living, the cost of doing business, borrowing money, mortgages, corporate and government bond yields and every other aspect of the economy.

Inflation causes interest rates to rise and as interest rates rise, the government will have to spend more to pay interest to the public investing in government bonds, bank fixed deposits and company fixed deposits.

Supply side inflation is a major factor for rising inflation in India. Agricultural shortages or damage in transit create shortages due to high inflationary pressures. Similarly, the higher cost of labor ultimately increases the cost of production and leads to a higher price of the commodity. These supply driven factors are basically a financial tool for regulation and moderation. In addition, the global level effects of rising prices often affect inflation from the supply side of the economy.

Crude oil prices were the biggest contributor to the increase in WPI inflation in March 2022. Related prices are a significant contributor to the war in Ukraine and high crude oil prices.

The annual inflation rate in India turned slightly below market expectations in June 2022. However, it remained above the RBI’s target range of 2%-6% for the sixth consecutive month. Food prices increased by 7.56%, especially vegetables (17.37%), spices (11.04%) and oils and fats (9.36%).

Additional upward pressure came from the costs of transportation and communication (6.9%), health (5.47%), education (4.51%) and housing (3.93%). Consumer prices rose 0.52% on a monthly basis after a gain of 0.94% in May. As per the forecast for July 4-11, inflation was set to measure 7.3% and 6.4% in Q3 and Q4 2022, respectively.

Data Sources: Investopedia, Economic Times and Livemint.com

Views are personal: The author – Dharmesh Parikh, Mutual Fund Distributor, Eurasia Capital Services

Disclaimer: The views expressed are those of the author and are personal. TAMPL may or may not subscribe to it. The views expressed in this article/video are in no way intended to predict or time the markets. The views expressed are for informational purposes only and have no meaning

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