In this article, we will learn about inflation and CPI. We will also explore how inflation and CPI are related to each other. Inflation is a term we often hear in the news, especially when prices are rising. But what does it really mean? Understanding inflation is important because it affects our daily lives and the economy as a whole. So, let’s begin.
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What is the meaning of Inflation?
When the cost of basic goods that we buy every day—like food, clothes, and other essentials—rises over time, this situation is called inflation.
Inflation causes reduction in the purchasing power of money. When prices go up, the value of money decreases. This means that you can buy less with the same amount of money. For example, if inflation is high, something that used to cost ₹100 might now cost ₹110. This reduction in the purchasing power of money is what we call inflation.
- Inflation is measured using the Consumer Price Index (CPI).
What is CPI?
The full form of CPI is Consumer Price Index. The CPI is like a basket that contains a variety of basic goods and services that a typical household needs, such as food, clothing, and healthcare. By tracking the price changes of these items over time, we can calculate the inflation rate.
What is Inflation Rate?
It is the percentage change in the price level of goods and services over a period of time. It’s like a report card that tells us how much prices have gone up or down. For example, if the CPI was 100 last year and it is 105 this year, the inflation rate would be 5%.
How Inflation Rate Affects Stock Market?
Inflation can have a significant impact on the stock market.
When inflation is high, the cost of living increases, and people may spend less money on non-essential items. This can affect companies’ profits, which may cause their stock prices to fall.
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On the other hand, some companies may benefit from inflation if they can pass on the higher costs to consumers by raising prices.
What is Deflation?
Deflation is the opposite of inflation. It occurs when the prices of goods and services decrease over time. While this might sound good, deflation can be harmful to the economy. When prices drop, people may delay purchases, hoping for even lower prices in the future. This can lead to lower demand, causing companies to reduce production, cut jobs, and even lower wages.
The Bottom Line
Inflation is a natural part of the economy. It affects how much we can buy with our money and has a big influence on the stock market. Understanding inflation, how it is measured, and its impact can help us make better financial decisions. Whether we are dealing with inflation or deflation, both can have serious effects on the economy and our day-to-day lives.