Finance Session - Post 10

[Nordicsupreme]

Dear Zevist Family!



Greetings!!!

For topic 10 we will be focusing on a topic recommended made by our contributor and esteemed member @Edward666

TOPIC : INFLATION AND UNDERSTANDING ITS IMPORTANCE TYPES
Keywords/Glossary​

Inflation: it refers to a situation marked by a sustained increase in price of goods and services increase with time. What this results in is the final purchasing power of the money decreases

The concept of inflation is intertwined with a phenomenon known as the Cost of Living Crisis Concept.

• Cost of living crisis : In simple understanding of the concept, when the cost of basic commodities is not in line with the increase in wages this leads to a cost of living crisis. In such cases, basic survival for people in the economy is very tough.​

To understand these concept is essential since it impacts almost every aspect of our lives. I am attaching a couple of instances of the cost of living crisis in the recent years:

• United Kingdom : https://commonslibrary.parliament.uk/research-briefings/cbp-9428/
  
  If you go through the line you will find that the the inflation rate for the United Kingdom peaked at over 11% in 2022.
• Argentina : https://reliefweb.int/report/argentina/argentina-economic-crisis-2024-emergency-appeal-mdrar022
• Sri Lanka :
  https://en.wikipedia.org/wiki/Sri_Lankan_economic_crisis_(2019%E2%80%932024

Deflation : Refers to a sustained fall in prices of goods and services over time.

This phenomenon is not as common as inflation. This can occur due to a variety of reasons like : Demands/Consumer Spending falls, low economic output which makes loan repayment tough, relatively strong currency (as in case of Switzerland).

Examples of deflation are :

• Switzerland : https://global.morningstar.com/en-gb/markets/safe-haven-status-heaps-pressure-swiss-national-bank
• United States of America : https://www.everycrsreport.com/reports/R40198.html

Disinflation : This refers to the condition where the prices of goods/services in an economy continue to rise. But the steepness in rise of prices gets lower every progressive year.
Reasons for disinflation are falling commodity prices, efficient supply chains, revised monetary policy imposed by the Central Bank to move towards a less Hawkish Monetary policy.

Categories of Inflation​

• Demand Pull Inflation: As the name suggests, this is a category of inflation where the demand far exceeds the supply of goods and services in the economy. On account of this imbalance prices of goods and services increases in the economy. This can be for a myriad of reasons which include: more disposable income with citizens, greater exports by the country leading to higher inflow of Foreign Exchange and a Revenue Surplus, Government investing in Capital Expenditure Projects which generate employment or provides Stimulus Packages.

• Cost Push Inflation: This is a case where the producer of Goods and Services passes on the increased input costs on to the final consumer. This results in the products getting more expensive. The increased costs incurred by the producers can be due to a wide range of reasons like Supply Chain Disruptions ( Eg. Increase of Price of Goods due to Supply Chains being affected due to Russia-Ukraine war or due to the Covid Pandemic), Increased Salary to be paid to employees, increase in price of raw materials, currency depreciation among other reasons

• Hyperinflation: This is an extreme condition where the prices of goods and services grow out of control and the value of money as a result depreciates very fast. Example: Weimar Republic (1921–1923). During this time the value of currency fell so drastically that people had to pay “millions” to buy a loaf of bread.
  

A link where you can read about how bad the situation had become due to hyperinflation in the Weimar Republic. Since this is not a direct ToZ site, I will prefer that you look at it only from an Economic point of view
https://www.thesecondworldwar.org/interbellum-1918-1936/1918/the-weimar-republic/hyperinflation

• Imported Inflation: The price of gods and services in an economy increases rapidly on account of imports getting expensive. A recent example of this was the disruption caused in the Eurozone due to the Russia-Ukraine War.

• Sectoral Inflation: This refers to a situation where the increase in prices of goods or services is restricted to an industry or a set of industry. Example: Real Estate Housing Crisis in Canada. You can refer to the link underneath to understand how complex the housing crisis is in Canada at the moment. The average cost of homes went up from CAD 300k to over CAD 700k from 2013 to 2024. The wages did not rise at the same rate. This has led to a miserable condition for the citizens.

https://theconversation.com/whats-b...eak-down-the-different-factors-at-play-239050

• Pace of Inflation: Inflation can also be categorized on the basis of pace with which the cost of goods and services in an economy rises. This can be creeping inflation (slow rise in prices of goods and services, more common in developed economies), walking inflation (Inflation is present in the economy but is under control) and galloping inflation (prices of goods increases rapidly and grows out of control – leads to hyperinflation in the long run)

• Shrinkflation : this is a case where the price of the goods/service remains the same but the size, quantity, services provided are reduced. https://corporatefinanceinstitute.com/resources/economics/shrinkflation/

Thank you for Reading Dear Family!
Please let me know if there are any corrections needed and feel free to add or remove topics

 

[Edward666]

Excellent analysis. These concepts influence our lives more than we can imagine.

 

[Nordicsupreme]

If it interests anyone, I am sharing an interesting link I found online with respect to Cost of living Crisis : youtube.com/watch?v=jgw8m8Yq_S0