A coffee used to cost ₹25 in 2010, and today it costs ₹40—this is the typical example you hear when people explain what is inflation. There’s nothing wrong with it, but there’s more to inflation than just the price increase. It’s important to understand the nuances since, inflation affects everything from how much you can invest to the returns on your investments. Even more so, given the phenomenal spike in inflation across the world, including India.
In this video, Karthik explain what is inflation, what causes it and how do central banks like RBI try to control inflation. Along with the video, we’d recommend you read these two related Varsity chapters:
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Inflation is a term that is frequently heard in the news and discussed by economists, but what exactly is inflation, and what causes it?
Inflation refers to the increase in the price of goods and services over time, resulting in a decrease in the purchasing power of a country’s currency. In other words, as inflation rises, the same amount of money will buy fewer goods and services.
There are several different factors that can contribute to inflation, and it is often a combination of these factors that leads to an increase in prices. One common cause of inflation is the increase in the cost of production. When the cost of raw materials, labor, or other inputs rises, companies often pass these costs onto consumers in the form of higher prices for their products.
Another cause of inflation is excess demand. When there is an increase in demand for goods and services but the supply is unable to keep up, prices can rise as businesses seek to capitalize on the high demand. This type of inflation is often referred to as demand-pull inflation.
In addition to these factors, inflation can also be caused by increases in the money supply. When central banks print more money or lower interest rates, the amount of money in circulation increases. This can lead to a situation known as too much money chasing too few goods, ultimately resulting in inflation.
There are also external factors that can contribute to inflation, such as changes in the exchange rate or increases in the price of imported goods. These factors can lead to what is known as imported inflation, where the cost of goods from other countries rises, leading to an overall increase in prices domestically.
Inflation is generally measured by tracking the Consumer Price Index (CPI), which looks at the prices of a basket of goods and services over time. When the CPI rises, it indicates that inflation is occurring.
While some level of inflation is considered normal and even necessary for a healthy economy, excessive inflation can have negative consequences, such as eroding the value of savings, reducing the standard of living, and increasing uncertainty in the economy.
Understanding the causes of inflation can help policymakers and individuals make informed decisions about how to respond to changes in prices and work towards maintaining a stable and healthy economy.
Awesome
Thank you for the simple, yet clear explanation. I'm currently reading the book "Who Moved My Interest Rate" by the former RBI Governor Duvvuri Subbarao, and hopefully this concept of inflation will help me understand some of the topics covered in the book.
Thank you and your Team for the app, the videos, your time, energy and effort. God bless heroes like you.
Hey Karthik, demand fuelled inflation is due to availability of excessive cash with the public which leads to increase in demand and hence increase in prices and to handle that the govt. decreases repo rates which leads to injecting more cash in banks ( and in turn with the public). In this case, shouldn't the repo rates be increased (or kept as it is) because it is the purchasing power of the public which is leading to the increase in demand. If the purchasing power is reduced (be reducing liquid cash), the demand and in turn prices will also go down. From what I understand the govt injects more liquidity into the market to solve a problem which was in first place caused by excessive liquidity itself. Can someone please help me understand this? Thanks!
One of the best explainers of inflation I saw on YouTube. Keep creating these kind of videos.
Hindi series bana please
Awesome explanation
Can yiu please make a video on correlation between interest rates, bullion, crude, currency exchange rates and what is the sequence of them to be observed that influence the other in terms of stock markets.
Please make a video on recession.
Thanks
Thanks Karthik for simplifying the concepts which is a must know in today's world…. wish the program is a perpetuity.
Superb
You are a genuine person. You are a GURU to many of the market participants. God will definitely bless you with good things because of prayers of people like us. We are very grateful to you.
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It's explained so simply yet clearly. Thank you so much.
Such a clarity in understanding…worthful to watch
Absolutely loved the simplicity of presentation. Thank you sir
We owe you a lot.
Karthik is so hot, any topic becomes really interesting
Thanks a lot for a simple explanation ! Appreciate it. Eagerly waiting for you to finish the integrated financial modelling in varsity full pdf. I know you must be really busy, but want to thank you for ur effort… Very valuable teachings and informative study material.