Effect of Inflation
From daily need products to used gadgets, the stock market, the housing market, cryptocurrency, inflation has a major role for investors and customers. The reason behind that is the price hike with time on every product, service, and asset.
Depending on the state of the economy inflection can take place with uptrend, or downtrend due to different reasons.
Here, in this article, you will get to know all the possible reasons for inflation, and its effects on currencies, commodity prices, and the economy.
Reasons For Inflation
There are different reasons for inflation including increased money supply, devaluation, policies and regulations, rising wages, cost-push inflation, and demand-pull inflation.
- Increased Money Supply
The total amount of money circulation that includes bank accounts, coins, balances, and cash is known as increased money supply according to the Federal Reserve.
If the supply of money increases rapidly as compared to the production rate, then there is an increase in inflation.
The downward adjustment in the exchange rate of the country results in lowering the values for the currency of the country.
- Effects of Inflation
There are good as well as bad effects on inflation on the economy, currencies, and commodity prices.
Effects on Economy
There are two types of effects of inflation on the Economy.
Talking about good effects, better returns on investments, increase in the quantity of production, higher profits and products, better income and more employment, good income to shareholders of the company, upper edge to benefit for borrowers, etc.
Unfavorable effects of inflation consist of fall in income for fixed income groups, increase in unequal distribution in the income, disturbance in the Planning process, losses to lenders, fall in export income. one more point to note is that inflation hurts capital accumulation.
- Effect of Inflation on Currency
Inflation causes a decrease in the value of a currency with time. It simply means if you have some money in your pocket today, its value will decrease after a certain duration, if you don’t invest that in any asset equity or interest-bearing bank account.
Effect of Inflation on Commodity Prices
Commodity prices have an inverse relationship with the currency value. As the value of the US Dollar increases commodity prices decrease.
Change in commodity prices indicates inflation via two basic channels. There are measurable changes in the economy due to changes in commodity prices.
Inflation is one of the major factors behind the surge in the prices of gold in the world.
According to Fed, inflation can go above their 2% goal. Fed is planning to increase gold interest rates in the country approximately 7 times in the next 3 years.