Black and White are interesting
colours. In few occasion wearing a Black shows the sad situation while for some
cases like in marriage or business meetings this is called the formal. Black is
associated with Black Magic a negative thing but black long hairs are
symbolised as beauty. Similarly white is colour of peace and sorrow for some
religions while for some it is for the celebrations (i.e. marriage).
What does it means?
Well as I understand most of the
things have two sides and different people look at it through different perspectives.
For some it is a sign of happiness for some it may be a symbol of sad and bad
things.
Inflation also has two sides, while
few countries especially the growing/developing nations are fighting hard to
reduce/control it, while on the other side there are countries form developed
nations like Japan who are struggling to increase it. Interesting but true.
What actually the inflation is?
As a dictionary meaning Inflation
means continuous rise in the prices at a broad level.
In the economic terms it is
called as: too much of money chasing too few goods and services.
How Inflation Moves?
When the gap between demand for
goods and supply of money is too high, it causes prices to rise at a breath-taking
pace. While a low to moderate gap results in a steady but minimal rise in the
prices.
So when Inflation can be called as Good?
When the Prices of goods and
services in an economy rise moderately and linear way it will be considered as
desired.
But why should the rise in prices can be good?
When inflation rise moderately, Companies
invest more in their businesses to increase their production to meet the
‘higher’ demand for goods/services. Therefore, more manpower is needed which
pushes wages upwards. Money invested in production capacities fetches higher returns,
which in turn accelerates the shareholders’ returns as well. This way economy
creates more employment opportunities and also increases the wealth of shareholders
as well as improves the tax revenue for government. A kind of win-win situation
for all the stakeholders.
How high inflation impacts?
Some time there is lot of money/liquidity
in the economy which results into such s strong demand that despite investing
massively in production capacities, corporations usually fail to meet the
demand. This spikes the prices of goods and services resulting them to become
almost unaffordable.
This in turn reduces the
discretionary income of the majority of households resulting into buying lesser
goods. Then Companies suddenly realise that they went overboard with production
during the boom time and soon start realising their overheads are
unsustainable. This results into layoffs of employees. As people lose jobs,
demand for goods and services falls again, followed by the price reductions
which someday jumpstarts the economic upswing again.
So, how much
inflation is good?
There is no fix formula for it.
It depends on that country’s economic growth as well as the rate of inflation
elsewhere in the world. As said earlier,
usually, developing nations witness sharp swings in inflation and cost of
capital due to lower income and scarcity of capital and other resources.
As the country becomes developed economies
the inflation goes down and stabilizes. This is because Economic prosperity
reduces price volatility especially the essential items as they are the items
which are important but will have some limited demands. (A person will not
start eating more if he becomes wealthy).
What is life style inflation?
There is one standard inflation figure which is published by
the government agencies. But is it really the inflation number for every person
in that economy. The answer is NO.
Every person is unique and has
different life style and accordingly the consumption is also different for
different persons.
For example a Non-vegetarian person will be more impacted by
the prices of fish and meats whereas the vegetarian person may not have any
impact.
Twenty years back we use to have
one TV in a home now we need in every room. One landline telephone was not just
serving the family but the whole area and now every family member needs to have
mobile phone in fact many of us carry two-three phones. So the cost of phone
lines might have reduced but due to higher consumption our bills have not. One
year school fees in a good convent school today would be equal to the amount of
total fees paid from Nursery to College thirty years back. Similarly in every
aspect of our life our aspirations have gone up and hence the headline numbers
have very limited relevance and every person has to analyse his/her own inflation
based on their own life style and aspirations.
How it impacts our investments?
So while deciding our future
financial goal we need to consider our actual requirements and what kind of
inflation it has historically. For example the education fees/ medical expenses
rise much more than the headline inflation numbers. Further it could be worse,
if inflation spikes up for any reason at a time when our goal is up for the
fulfilment. Therefore, make a point to be conservative about the estimation of
return on your portfolio and be cautious about the estimate of inflation.
To reach our financial goals and
beat the inflation we need to ensure that we are investing in those assets
which have capability to beat the inflation Equities and Equity based Mutual
funds are those which can give us higher than inflation numbers over a longer
period of time.
To Conclude
Inflation is a number based on various
economic and social factors, and every individual has a different inflation
number based on his own life style and expenses. We cannot say inflation good
or bad on its own but other factors make it a boon or a bane. To face high
inflation we need to have a proper financial plan in place.
