I love Inflation. Do you?

Thanks to all your encouragement - I am Happy to start this new column on various Marco-Micro-economic concepts & happenings, Geopolitics, New trends and the likes

#Macro2Micro chapter-2 : WTF is INF-LATION?

What is inflation? and How does it affect a country or economy?

Inflation is nothing much the factor by which prices increase in a country. But then what are the various causes that cause prices to increase?

DEMAND LED INFLATION: People have more disposable income and they start buying more things (i.e. increased demand compared to supply) as suddenly they find prices very attractive compared to earlier - for e.g. Dinner for 2 at Rs 4000 In Hyatt or a flight ticket to Delhi at Rs 7500 doesn't need much thinking for a lot of us, thanks to our increase in disposable incomes. This leads to more people buying and prices moving up - just like that in stock market!

The factors that lead to demand led inflation are - economy (jobs & income) growing steady well like we saw in India/china, People suddenly getting more cash hand-outs from Govts (like US/Europe during covid, which lead to recent inflationary economy everywhere), Large % of young population who earn and spend, relatively sudden availability of money in a country due to a new discovery like Lithium which alters the fate of the country (say Bolivia)boliu or start-up led investments coming in (India), Or a loose policy like low interest rate which makes easy credit available and hence boosts the demand.

SUPPLY LED INFLATION: While Demand remains same, but Supply reduces suddenly - just like Oil/Gas, or commodities or Food - like we saw in case of Covid and Ukraine war. This leads to prices moving up suddenly - how all metals / grains/ corn/ vegetable oil/Petrol all went up due to covid related constraints and war etc

The other key factors that affect inflation are – exchange rates, monetary OR fiscal policy, economic growth, wage growth, or just mere expectations of people – hopes & fears.

How does inflation affect an economy?

Inflation is a good indicator, if it is steady and predictable - it indicates healthy demand-supply equilibrium and growth of a country.

But its a very very dangerous animal too. How?

If you are a predominantly import led country like emerging economies and are paying in $$ for essential commodities like food, meds, chemicals and oil, this can affect us in many unexpected ways, especially during sudden short term global shocks like pandemic or wars or financial crisis

1) Your buying prices increase if global commodity prices of oil or commodities increase.

2) But since we have to pay for these in $$$, It can worsen our CAD deficit (export - imports) and lead to currency outflow.

3) Unless we have adequate forex reserves, Currency outflow can lead to quick depreciation in currency, which makes imports even more costlier - leading to a cyclical effect.

4) Import led price inflation can prompt the Central banks to increase rates to keep currency stable and to bring more inflows and to lower the demand of imports.

5) Currency losing value will make ECB (external debts) more expensive and higher interest outflows and such bonds lose value quickly - eroding profits of corporations who rely on external debts (e.g NBFCs and infra cos).

6) Srilanka and pakistan recently ended up having less than 30-45 days of forex cover to meet cost of essential imports - and this led to massive shut down of the economy - no petrol in pumps, no essential medicines in hospitals, no fertilizers for agriculture, and so on. People took to streets. Can even lead to civil war and toppling of governments (e.g UK or Lebanon)

Which countries tackled highest inflation in recent years - Argentina, Lebanon, Zimbabwe, Turkey, most recently Srilanka-pakistan etc. Some of these had inflation in the 3 and 4 digits (i.e. 1000% and 100% etc) at some points. Its quite shocking when you see your money eroding in seconds, right?

Why and how did these countries end up in high inflation and how did citizens and govts and the world react to it? How did UK ex-PM Liz Truss lose her job just because she didn't tackle the inflation well? Why is Turkiye in perennial inflation because Mr. Erdogan has his own unique economic philosophy? How do black markets thrive in Lebaon and zimbabwe? There are many such stories.

And which are the countries who love and pay to get some inflation and still not getting any luck in getting laid for decades ? e.g. Japan

Who are the cousins of inflation? - deflation, stagflation etc

There are so many aspects to Inflation - perhaps the most complex animal in any economy.

Will try to cover as much as possible - To be continued in part-2 and Part-3 respectively :)

Do share your comments and thoughts :)

Read chapter-1 here:

https://www.dhirubhai.net/pulse/indias-population-enormous-opportunity-arun-anand?lipi=urn%3Ali%3Apage%3Ad_flagship3_profile_view_base_recent_activity_details_shares%3BK%2F5mPy51SrSf0HvM0LVolg%3D%3D