Inflation is the rate at which the average cost of goods and services is increasing and, as a result, the buying value of money decreases. The buying value of everyone has considerably reduced if salaries do not rise in tandem with the cost of products, which can result in a declining or stalled economy.
Understanding Inflation
Human requirements go beyond one or two things, even if tracking price changes over time for specific products is simple. People require a wide variety of items and services for a comfortable life. Commodities include food, metal, and utilities like electricity and transportation, and services cover entertainment, workforce, and health care.
The annual inflation rate determines the overall effect of price changes for various goods and services. It enables a single value presentation of the rise in the cost of goods and services over time in an economy.
How is Inflation measured?
Inflation is a rise in the cost of household products and services. It is estimated as the pace at which such prices change. Prices often increase over time but can also drop (deflation).
The Consumer Price Index (CPI) is the most well-known measure of inflation which calculates the percentage change in the cost of a selection of products and services that households typically use.
When the actual inflation rate differs from the predicted, there is a greater risk of inflation. The simplest basic strategy for reducing the risk of inflation is to include an inflation premium in the interest rate or required rate of return (RoR) for an investment.
Types of Inflation
The types of inflation cover:
- Demand-Pull Inflation: Demand-pull inflation results when the amount of credit and money available to consumers increases more quickly than the economy’s ability to produce those goods. It raises demand, which causes price hikes.
- Cost-Push Inflation: Cost-push inflation is an outcome of price increases spreading through the inputs used in production. Costs for all intermediate goods increase as more money and credit are directed toward the commodities or other asset markets.
- Built-in inflation: Built-in inflation has to do with adaptive expectations, which is the concept that individuals anticipate that the current inflation rates will persist in the future. People may expect an ongoing increase at a similar rate as product and service prices grow. The cost of goods and services rises due to increased earnings, and this wage-price cycle keeps going as one element drives the other and vice versa.
Cause of Inflation
following are some of the causes of inflation:
- A decline in the exchange rate
- Increased demand as a result of fiscal stimulus
- Economic stimulation provided by money
- Rapid growth in other countries
- An increase in the prices of Raw Materials and other components
- Rising labor cost
- Inflation expectations
- Increasing indirect Taxes
- A decrease in the exchange rate
- Monopoly employers/ inflation-driven by profit.
How to beat inflation with a portfolio of mutual funds?
Make sure your portfolio is diversified, which means you have exposure to various mutual fund types. Equity mutual funds are a significant component of your portfolio since they consistently produce returns that surpass high inflation.
Conclusion
Investing in equity-oriented mutual funds is crucial since they provide more substantial returns than inflation, which prevents one’s wealth from being reduced or absorbed by rising inflation. This is how you may reduce the crippling effects of inflation. It’s also a good idea to balance your portfolio with enough debt mutual funds to minimise return volatility. DSP mutual fund is one of the best that can assist you in having a check on inflation while maintaining a good portfolio of its mutual fund.
