“Inflation means that your money won’t buy as much today as you could yesterday.”
Inflation is either rise in prices or a fall in the value of money. An increase in the cost of things that are necessities or decrease in the value of money, so that it takes more currency to buy the same goods and services it did in the past. Inflation directly affects a country’s economy and devalues its goodwill. However, inflation impacts the economic indicators, so they reveal the inflated or deflated economic condition of the country. In India, inflation is measured on the basis of the Wholesale Price Index (WPI) and Consumer Price Index (CPI).
Causes of Inflation
- If a country has printed too much currency or experienced financial disaster, causing its currency to plummet.
- Due to higher input or transportation costs, which becomes expensive to ship goods to retail stores, increasing costs for consumer.
- Low interest rates are also responsible for inflation. With low-interest rates credit cycle goes up with more and more people taking credit for varies purposes. This is why the central bank RBI (Reserve Bank of India) keeps interest rates in check as per Inflation numbers quarterly.
- Too much money supply in the system also causes rise in inflation. It will increase the purchasing power of consumers thus raising inflation.
- Countries like India which are primarily depended on other countries for their energy needs (mainly crude oil & natural gases) also suffer due to rise in inflation as the prices of the crude oil see a rise in the international market.
- Increase in government expenditure is also responsible for the high inflation as more expenditure means more money in the system which eventually causes rise in inflation.
- Rise in imports is another important factor. With more money going out of the country, it not only weakens the domestic currency but also give rise to trade deficit.
In a nutshell, we can sum it up and say that rise and drop in inflation is mainly due to demand and supply cycle. If demand cycle is on the rise, inflation will go up and if demand is on low, inflation will go down.
A high inflation rate is anything over 3 to 4 percent annual range. Reasons for high inflation rate in India is due to it being a fast-developing nation. High inflation and fast growth move hand in hand. The major effect of inflation is that a nation’s nominal currency loses its value, i.e. more currency is used to buy the same quantity.
Inflation can be measured by using an Inflation Index. The most popular index used is the Consumer Price Index (CPI). It examines the weighted average of prices of a basket of consumer goods and services; such as transportation, food and medical care. CPI has frequently used statistics for identifying periods of inflation or deflation, as large rise in CPI during a short period typically denote periods of inflation and significant drops in CPI during a short period usually denotes deflation.
Varying rates of Inflation in India
India has seen both low and high inflation. In 2009, inflation was at 14.97% which makes it highest since 1998, when it was 15.32%. In the early days of the Indian republic, other than 1956, inflation stayed at a controlled level below 10 %. No one could even set their own prices since the government controlled everything.
Between 2000 and 2010, inflation varied from 0.48% in year 1999 to as high as 3.48%. However, after this inflation witnessed a decelerating trend and remained at about 3.72% in 2003. In 2004-05, a spurt in domestic food prices due to monsoon coupled with a spurt in the international oil prices drove up domestic prices. Inflation began to ease in the second half of 2004-05 under the impact of a combination of fiscal and monetary measures.
Period of 2003-09 witnessed high inflation in manufactured products mainly on account of high prices of raw materials. While major drivers in 2008-09 were high international fuel and commodity prices. 2009-10 was marked by a global slowdown and unfavourable monsoon, average inflation during this period was 3.6 percent.
2009-13 has been marked as high inflation period resulting from elevated inflationary expectations, hike in vegetable prices due to unseasonal rains post monsoon and rising global commodities prices. Food items were the main inflation drivers. Declining growth during 2011 was expected to ease the pressure on core inflation, but the extent of modernisation was constrained by depreciating rupee and high global commodity prices.
Sectors Benefited due to high Inflation
They are basically daily necessities which are not affected by either rise or fall of prices. Example: gas cylinders. No matter how much their price hikes, consumers will still purchase them at current price as they are not left with any other option. Demand for necessities never falls may it be milk, salt, food, etc. They perceive high demand even during high inflation period.
Sector to invest in: FMCG industries, ITC.
Raw material being the main essence of the production process does not operate as per hike in prices. High Inflation indicates a growing economy which means production as per the demand of the product is increasing, leading to more demand for raw material.
Stocks to invest in: Rubber industries, Apctox industries.
As purchasing power of cash gets eroded during time of high inflation, its better one should opt for a fruitful investment that can yield good profit not today but in future.
Stock to invest in: Bullions, gold.
Health is one of the primary unavoidable needs. Fluctuations in prices do not cause any effect on this sector.
Stock to invest in: Hospitals and Medical services; Apollo hospital
Its demand too is not affected by high inflation instead is positive for it because no matter what oil is still demand in as petrol for vehicles and Airplanes; and there is no replacement for same.
Stock to invest in: Oil drilling and exploration; ONGC, GAIL.
Real estate is one the sectors which is benefited with rise in inflation because not only its property prices goes up but if it is used for the rental income than with rise in inflation monthly rental also goes up.
Stocks to invest in: Construction and contracting- real estate; DLF, HUDCO.