No one can avoid economics, as it is directly or indirectly connected with almost every aspect of the life.
It is needless to say that people have to buy and sell things, using money as the medium of exchange, the value of which fluctuates from time to time, due to various reasons. It plays a big role in one’s life as well as in the economy, further having an impact on the growth.
Rising prices is known as inflation in general terms.
If we explain it in economic perspective, inflation is a general increase in prices and fall in the purchasing value of money. Accordingly, rising inflation can hamper personal and economic growth.
Reality
Inflation is an economic phenomenon that people don’t need knowledge of economics to understand, because it is something that people feel. You can remember how much less you paid for goods and services even few years ago, when you are shopping these days.
Inflation increased from 4.8% in July to 6% in August 2017. Food group has increased from 4.8% in July to 6.9% in August 2017 and non?food group has increased from 4.7% to 5.7% during this period.
What has severely impacted on the public is that prices of food group have gone up considerably. Coconut prices are also sky-rocketing, making people to spend more on day-to day food items.
Causes
What causes inflation has to be discussed, in order that we can have a broad understanding on inflation. It can take place in two ways; demand-pull inflation and cost-push inflation.
Demand-pull inflation occurs, when there is a considerable increase in demand for goods and services. To put it simply, once the main actors of the economy; households, businesses, governments and foreign buyers demand more goods and services than the economy can produce, further resulting in a situation where they have to compete with each other to purchase. Consequently, what happens is that prices go up, and then inflation also.
On the other side of the same coin, an economy can experience cost-push inflation. It could happen, when there is a considerable decrease in the output of the economy. Moreover, supply less than demand can lead to a situation where buyers have to increase their bid prices so as to buy limited quantity of goods at the market. This is also a type of inflation.
In addition to these two main types of inflation, anything having an impact on the aggregate demand or supply can accelerate inflation. Sudden increase in money supply, interest rate, taxes and natural disasters decreasing the supply are among them.
Victims
Even though it is a known fact that inflation is an increase of prices, but how it spills over into other segments of the economy should be widely discussed. Even if everyone in an economy has to experience inflation, they are unequally influenced by inflation, meaning that there are losers as well as gainers in an inflationary period.
Businessmen seem to be able to make profits in an inflationary economic environment, owing to higher prices that they receive for their goods and services. On the contrary, since cost of the inputs for production process is also expected to go up in inflation, business community cannot make higher profits and may have to struggle for selling their goods in a situation where consumers try to cut their expenses as much as possible by purchasing only the essentials.
Debtors can to a certain extent benefit from the inflation, as they utilized the loan with higher purchasing power. However, currently, the real value of money has gone down. Hence, debtors can pay less to creditors in real terms.
Losers will be fixed income earners, pensioners and savers. It is obvious that a person that saves one thousand rupees will get his savings low in return, due to inflation. Fixed income earners like employees have to struggle for living, because their salary will not be increased in comparison to the rate of inflation in the economy.
Solutions
It is true that inflation is up. Long-term solutions for this economic problem have to be encouraged. Whatever said or done, Sri Lanka is a country highly dependent on imports, the cost of which is totally out of control under the prevailing world market conditions. If so, what must be done to keep the inflation under control is to encourage domestic production. Supply can be cheaply increased only by producing goods locally.
(Amila Muthukutti is an economist. His academic interests include economics, financial markets and business administration.)
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