Today we see unprecedented events taking place – the novel coronavirus has impacted almost every country worldwide. While the global economy was steadily working to accelerate growth to recover from the recession brought on by the coronavirus outbreak, new challenges arrived.
All prime countries suffered unprecedented domestic inflationary pressures and growth erosion due to the pressure on global crude oil prices and supply-side constraints.
The enormous increase in inflation rates over the past six months has alarmed many government officials in India, and the ordinary citizen is in shock over the relentless rise in the price of necessities, particularly food items.
In January 2022, the inflation rate was 6.01%, and in June 2022, the rate increased to 7.01%, and in April it was as high as 7.79%.
India’s GDP prediction for 2022-23 has been lowered by several economists due to high inflation, following monetary tightening, and an impending global recession
However, what is triggering inflation, what will happen as a result, and how can it be dealt with? In this article, your queries will be addressed.
What is causing inflation tendencies in India?
The following reasons are causing inflation tendencies:
- Soaring crude oil prices and supply shortages
Since the war between Russia and Ukraine started, crude oil prices have been soaring. Russia is one of the world’s greatest producers of crude oil, and due to the sanctions the US placed on Russia, the price of crude oil increased.
Due to this conflict, the global and Indian economies have been negatively impacted by severe supply-side shortages in several commodities, leading to increased prices.
- Rupee depreciation
The Rupee reached an all-time low and crossed 80 per dollar on July 19, 2022, setting a new record. The main factors are global events, such as the conflict between Russia and Ukraine, tightening financial conditions worldwide, and rising crude oil prices.
As the currency’s value falls, more money will be spent on importing goods, raising the price of domestic goods. Inflation will so rise, and people’s spending patterns will probably change as a result.
- Imports becoming costlier
The spike in crude oil prices only worsened matters as the weaker Rupee made imports more expensive. Consumers will now have to pay more to buy an item, thus signifying inflation.
What effects would inflation have on an economy?
The impact of inflation on an economy can be severe; some of the challenges faced by the economy will be:
- Pressure on a person’s household budget
Inflationary pressure is one of the biggest challenges to any economy. It can have a devastating effect on the commoner’s household budget as it increases the cost of living, which makes it difficult for them to manage their day-to-day expenses.
Consumers’ purchasing power will decline as prices rise. You might not be able to buy as much food, clothing, other necessary items, etc.
- Interest rates hike
To combat inflation, the best measure is to increase the interest rate. This rise in interest rate is necessary to curb the inflationary spiral as it helps control price hikes and curtail demand for money by consumers.
With inflation, interest rates also go up, which can be detrimental for people who have fixed deposits or pay monthly instalments on their loans.
Higher inflation leads to higher interest rates, making it harder for businesses to borrow money from banks at reasonable rates and invest in growth projects. This forces them to cut down on their investments and lay off workers, which further hits the economy’s growth rate.
Moreover, individuals will borrow less, as they will have to pay more for borrowing money (interest).
However, higher interest rates are good for people who want to invest in fixed deposits and bonds as they will receive higher returns.
- Economy slowdown
An inflationary spiral can lead to an economic slowdown as people tend to hoard their money, leading to a lack of liquidity within the market, and adversely affecting business operations.
How to beat inflation?
To beat inflation, individuals can follow the below strategies:
- Look for inflation-linked securities
Investing in stocks is a promising option if you want gains that will outpace inflation over the long term. Stock investments, however, are vulnerable to short-term high market volatility. Over the long term, however, the returns are frequently more than the inflation rate.
Investments in commodities can also act as a hedge against inflation because rising inflation rates also induce an increase in commodity prices.
Moreover, direct or indirect real estate investments may also act as a hedge against inflation.
- Keep a diversified portfolio
Another strategy to beat inflation is to diversify your investments. Spreading your investment over many securities will ensure that if one type’s value declines, another type will step in to fill the void, thus reducing the risks and volatility.
- Save for more bad economic conditions
The quickest way to start beating inflation is to save some money. Start examining how you might cut costs while continuing with your usual activities. Be sure to budget your costs properly and stick to your plan.
To sum up, since beating inflation is the ultimate objective, investors must develop their strategy based on risk tolerance. According to their investment objectives, investors may think about buying one or more of the assets.
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