Inflation refers to an increase in the price of goods and services over time. Inflation can have many causes, including changes in supply and demand, labor costs, or government policies. It also can be a result of inflationary monetary policy, which attempts to change the supply of money to impact interest rates and economic growth. Several factors affect how much inflation impacts your business and your bottom line, but you can reduce your inflation rate by keeping an eye on several key factors in the economy and adjusting your business accordingly.
The Long term effect of reducing the Inflation rate
For example, if Inflation is running at an annual rate of 8%, then $1 in one year’s time will be worth only 70 cents in today’s money (not purchasing power) i.e. purchasing power of dollar shrinks by 30%. This means anything that you are buying today like goods and services may get 30% costlier over next one year. If we look at a 5-year period, say from 2014 to 2019, then inflation during those five years would have shrunken your dollar value by almost 50%. So it makes sense for us to reduce our inflation rate from 8% to 6%, which would save us around 15% in purchasing power. And with all other factors remaining constant, reducing inflation rate by 2% would increase India’s GDP growth by 0.4%. That’s how important controlling inflation is for any economy.
Five aspects that can bring down the inflation rate
If inflation continues at a high rate, it will eventually lead to lesser income for people living in low and middle-income groups. One way to solve issues associated with inflation is through monetary policy. Besides keeping an eye on macroeconomic indicators, regulators should take note of several other issues that can contribute to lower inflation. Here are five aspects that could help bring down inflation rates 1) The central bank must ensure there is no credit crunch: High interest rates can be used as a tool to control inflation by increasing its cost. However, if banks start charging exorbitant interest rates, they might end up choking off credit flow to businesses and individuals. When demand starts falling due to lack of credit availability, there will be less incentive for companies to raise prices—which would have been necessary if there was higher demand due to increased borrowing. So, overall inflation could fall if banks don’t put too much pressure on lending rates..
Why reducing inflation rate is important?
Reducing inflation rate is crucial for any country, because inflation can have a negative impact on every household in that country. No one wants high levels of inflation; they undermine people’s purchasing power and cause higher prices throughout an economy. The value of money diminishes with each passing year. (For example, $100 today will only be worth $75 five years from now.) People are unable to make long-term plans or commitments when they don’t know how much things will cost in a few years.