Inflation

The Uninvited Guest – Inflation

by Shruti Agarwal on Basic Finance, Investing Basics
  •  
  •  
  •  
  •  
  •  
  •  
  •  

We all had felt the pinch of that abrupt effect in our expenditure against our planned budget. It makes our plans haywire and leaves us in dismay.

So did Mr. Khanna.

Mr. Khanna planned his yearly budget and accordingly estimated expenditure of Rs. 5, 00,000/- for the entire upcoming year.

At the end of the year when he reviews the budget based on his estimations, he finds that his expenses have soared high up to Rs. 7,00,000/- This means that there was an unexpected upward shift in the expenditure of Rs. 2,00,000/-

Let me tell you that one of the reasons for this gap of Rs. 2,00,000/- was inflation. Now, the question arises, what is inflation and how is this related to Mr. Khanna’s budget.

In this article, we will understand as to how, inflation was one of the factors for the increased monthly expenditure of Mr. Khanna by Rs 2, 00,000/-

What is inflation?

In simple terms, inflation is the effect that reduces the worth of money.

For example: Inflation = 3%.

Let us take another example. Mrs. Khanna prepares a list of groceries which costs her approximately Rs. 25,000/- monthly.

Every month she purchases the groceries and the shopkeeper charges her for the same amount. One day, Mrs. Khanna receives a bill of Rs. 26500/- for the same products that she purchased earlier.

On going through the bill, she finds that the prices of certain commodities have increased.

Now the products that she could buy at Rs. 1000 in the previous month, cost her (Rs. 1000 + 3% of Rs. 100 = Rs. 1003) in the next month.

This means that the purchasing power of the currency falls and the outflow of money from our pocket multiplies accordingly.

Thus inflation means the rate of increase in the general price level of goods and services over the period of time, commonly a year and eventually, a fall in the purchasing power of the currency.

This implies that inflations make things expensive for us. The amount to be expended on buying a particular product increases.

Know about other important macroeconomic variables  and their impact on the stock market by  joining :
NSE Academy Certified Macroeconomics course on Elearmarkets.

And the same happened with Mr. Khanna. Though, he bought the same products that he had planned for in the budget. He has to pay more than what expected because of the rate of inflation.

At the time of planning the budget, Mr. Khanna missed taking the inflation into consideration, due to which it seemed to him that the amount expended will be Rs. 5, 00,000/-

However, when he actually purchased the goods, the prices were higher due to the inflation rate. This eventually caused an increase of Rs. 2, 00,000/- in the total expenditure. Similarly, In the case of Mrs. Khanna, inflation increased the prices of groceries accordingly.

Though this is not the only reason for the increase in the total expenditure, certainly it can be one of the reasons for the same.

This article was a basic snippet on why does this term inflation bothers a common household budget.

Bottomline:

We hope that that post this article, Mr. Khanna and all of us will be more cautious and will always consider other factors including inflation as well before planning our budget.


  •  
  •  
  •  
  •  
  •  
  •  
  •  

Disclaimer

Elearnmarkets.com wants to remind you that all our content is created solely for the purpose of education. No strategy, stock, commodity, fund or any other security discussed here is any way a recommendation for trading or investing. Elearnmarkets.com will not be any way responsible for trading losses incurred by any individual or entity for trading with real money. Please take advise of certified financial advisers before trading or investing.

Speak Your Mind

*

This site uses Akismet to reduce spam. Learn how your comment data is processed.