REALIZATION OF INFLATION
now as we grow which we do we generally observe the different phases of changes in our lives, when we see a newly born baby we watch the tiny fingertips and structure of the baby which is naturally beautiful, but over the longer horizon of time, the shape and size of the baby change it gradually increases since it’s in our habitation to grow and evolve.
when a baby grows we observe it in the sense of human evolution, but we also see and observe shoddily the things that we must have a conscious focus on, for the survival of any living being consumption and production are two great aspects that have to be carried on and for the survival purpose of any living entity, we must be able to buy and produce goods of all kinds.
in order to buy and produce goods of all kinds we use a mode of transaction called “money” which runs on its current store hold called “currency” and since we use the currency for the transaction of any goods, for example: in India, 1kg of tomato was sold for approximately Rs.10-15 around year 2000~2004, but if we move to market to buy tomato of same quantity that is 1kg at present (2022) it is costing around rs.60-80 (also different in different states and countries with respect to its production and consumption ), we have considered an example of tomato but if we consider it for all other consumer products we literally observe the price to increase.
so, when we observe the prices just like a newly born baby at the initial stage they are moderate but if we look at them after a few decades we observe an insignificant growth in price and the structure of the baby, now if we focus on our surroundings we generally observe a growth or expansion or change in everything commonly over the period of time we do observe that everything is getting inflated.
so till here, we understood that by the very nature of our living the phenomenon of inflation has been there, and its effects have been consistent in our regular lives. in this blog, we will understand: what is inflation, how it affected the past what history tells about it, and what’s about to begin in the future. so by understanding the past, present, and future of inflation, we can help ourselves by having a sense of idea what should be done to protect our savings and investments.
WHAT IS INFLATION?
inflation is simply the rate of increase in prices over a certain period of time, it is measured broadly across the country.
since we understood that inflation is in the increment of prices over time but how does it affect us on our day-to-day living basis? here comes a focused point in the definition of inflation that it increases the prices of consumer goods only it has never been mentioned that ” it increases the wages of incomes of normal earnings ” since it affects an individual.
when an individual earns a certain amount of money in any mode of income, the person observes the increase in prices of goods but at the same rate his wages or income doesn’t get increased and as result, the person has to buy that product at a higher price by the shrinkage of their purchasing power. ( it affects the individual who has a fixed dollar/rupees income, that costs their living).
since we are understanding the meaning of inflation we must get through some of its correlative words, which are
What is SHRINKFLATION
now we did understand inflation, but to understand shrinkflation we must understand with the help of an example of a company ” for example – Cadbury dairy milk launches a product of chocolate of a very small price at rs.5 whose size is the smallest among all its variants in the year 1999~2004, but the most fascinating thing out here is we still get the product at the same price even after two decades how is that possible since we had just understood inflation ( that it increases over the year ) so? where was it? the price never increased?
now the answer to this phase is since the price was not getting increased it was the quantity of the substance decreasing- this effect is known as shrinkflation“
to understand this contradictory section we conclude that in the picture of inflation not only do the prices rise up but as an alternative, the quantity decreases now it depends upon the company itself to understand which one to consider to increase in price( inflation) or decrease in quantity by keeping the same price (shrinkflation).
What is DEFLATION
it is simply the rate of decrease of prices over a certain period of time it Is the mirror image of inflation and it is measured gradually across the global economy.
deflation occurs when the inflation factor passes the threshold limit of the global economy and as a result, the reserve currency starts a process called quantitative tightening which helps to cut the inflated price and decreases the values of prices( generally the process of deflation occurs after a market recession which we are about to enter – to read more about market recession you can click here).
“up till here, we understood that deflation is just completely the opposite of inflation”.
What is STAGFLATION
stagflation is an economic cycle where the economic growth of a nation decreases, and the unemployment rate is accompanied by inflation increases.
stagflation cycle occurs after every 80-95 years of change in the world order, to understand in short how the world order changes please watch the video given below.
What is HYPER-INFLATION
When a rapid increase in prices in an economy surges the prices to make it out of control this position of any country is due to the factor known as hyperinflation.
LEARNING FROM HISTORY-
most people don’t have the ability to learn from history, which is an impediment, though it varies by society. for example, the Chinese are excellent at this. learning from one’s own experiences is not adequate because many of the most important lessons don’t come in one’s lifetime.
in fact, many encounters in the future will be opposite than similar to what one encountered before in life. since the peace/boom period at the beginning of the cycle is opposite to the war/bust period at its end, the periods people face later in their lives. more specifically, generally, if you don’t understand since at least 1900 how that connects with what is happening now, there is a high likelihood that you will find yourself in trouble.
Every nation has a central bank example for India we have ( RBI) and exists in every country, so when the central bank of any nation loses its ability to produce money and credit that passes through the economic system to produce real economic growth, throughout history, central government and central banks have created money and credit, which weakened their own currencies and raised their level to monetary inflation in order to offset the deflation that comes from deflationary credit and economic contractions.
this typically happens when debt levels are high, interest rates can’t be adequately lowered, and the creation of money and credit increases actual economic activity.
at such times those who are holding debt( which is someone else promise to give them currency) typically want to exchange the debt they are holding for other store holds of wealth. once it is widely perceived that the money and debt assets are no longer good stores holds of wealth, the long term debt cycle is at its end, and a restructuring of the monetary policy system has to occur, which we all are observing and about to observe in upcoming years.
UNDERSTANDING THE ENVIRONMENTS OF INFLATION-
every single investment has its own advantages and disadvantages and basically, it depends upon the environment or weather of investing, during an interview between ray Dalio and tony robbins – when tony asked ray for a piece of advice, ray’s answer was to look into the history and he states-
"THERE IS ONE THING WE CAN SEE WITH ABSOLUTE CERTAINITY, EVERY INVESTMENT HAS AN IDEAL ENVIROMENTIN WHICH IT FLOURISHES. IN OTHER WORDS, THERE IS A REASON FOR EVERYTHING"
STARTING FROM THE YEAR 2000-2006, everywhere across the globe there were trillions and trillions of debt on household mortgages, as people tend to buy a house when the market tends to be at its peak paying high-interest rates, then the burst of 2007-2008 came into play when the home prices dropped like a rock and with it the spending and the economy of the world.
but in 2009 everyone experienced deflation, when prices sank that decreasing the valuation of prices of any asset class also the interest rates of the bank were getting decreased.
the most fascinating part to see is the performance of stocks during inflation – with the rise in inflation the stock prices rise, higher prices mean the company has the opportunity to make more money and rising sales( revenue) means growth in stock prices. this is what it has proven over time.
whereas bonds have different categories if we compare them with stocks, for example, gold bonds, if we have a season of deflation for example by falling interest rates, bond prices will rise.
so basically converging to a point we understand that there are four things that move the price of assets:
- RISING ECONOMIC GROWTH
- DECLINING ECONOMIC GROWTH
to understand the status of your own country regarding inflation or what the condition is, on which factors are the price of goods increasing moreover which sector of goods are increasing- you can visit the CPI- index of your respected country, where CPI( consumer- Price-Index).
for India, the link for the consumer price index is here. where you can see the CPI or the inflating price in goods every month and you can also observe which commodities prices are about to rise up next month, and on a whole sum you can identify the net inflation rate of your nation. which will provide you with a strong fundamental ground to understand the real economic system.
in order to overcome all the inflationary effects one must be able to diversify their investment portfolio and need deep research on what must be done before buying any asset class.