Basics of Stock Market - Beginner

Meaning of inflation

Inflation can be defined as an increase in prices caused by a variety of factors. Inflation is the sustained rise in the overall price level of an economy over a time period. It also measures the average price change of commodities and services over time.

What is the Inflation Rate?

Inflation rate refers to the percentage change in price over a given time period. It is usually greater than a month or one year. This percentage shows how fast the price increased during that period.

Inflation rate basics:

Different types of shares

The Companies Act 2013 section 43 states that the shares of a company can be of one of two types.

  • Hyperinflation is when the inflation rate exceeds 50% per month.
  • Stagflation is when inflation happens at the same moment as the recession.
  • Asset inflation is when the prices of assets such as housing, gold and stocks rise.

Two components play a significant role: The unemployment rate and misery index are two of the most important components. If the misery index is greater than 10%, it means that people could be in recession, suffering from galloping inflation, or both.

Causes of inflation

Although rising prices are the main cause of inflation, there are three other factors that can be blamed:

  • Demand-Pull Inflation: When the demand for goods and services rises faster that the production capacity. This causes a gap between supply and demand. This creates a gap in supply and demand. This causes an increase in prices.
  • Cost-Push inflation: This occurs when inputs to the production process are priced higher.
  • Built in Inflation: This causes adaptive expectations. The labor market expects higher wages when the prices of goods or services rise. This results in higher costs of goods and/or services.

Inflation Indexes

Multiple types of inflation values can be calculated for different goods and services and are traded as inflation indexes.

  • The Consumer Price Index (CPI). This is a measure that measures the average price of a basket consumer goods and services purchased by households. CPI is calculated using the price changes for each item in the basket and then averaging them. CPI is one of the most commonly used statistics to identify inflation. It is an economic indicator. All people living in the country are included (professionals, self-employed, unemployed, and retired). The statistics do not include the rural population, farm families and members of the armed forces. Two types of CPIs are reported every time:
    1. CPI-W is the measure of CPI for urban wage earners as well as clerical workers.
    2. CPI-U is the CPI for urban consumers.
  • The Wholesale Price IndexIt measures and tracks changes in the prices of goods before they reach end consumers. The WPI report is published monthly to show the average price change of goods. It is often expressed in percentages or ratios. It can be used to indicate the country's inflation level.
  • The Producer Price Index It's a collection of indexes that calculates and represents the average change in domestic selling prices over a time period. It also measures the cost of products from the point of view of the industries making them (seller perspective). PPI can be used to adjust prices in long-term purchasing agreements. PPI can be divided into three areas:
    1. Industry
    2. Commodity
    3. Intermediate and final commodity-based demand

We hope you find this blog useful in understanding inflation and its causes. Investing in the stock exchange is the best way to prevent inflation. Invest in long-term investments. Diversify your portfolio with different products, such as equity and commodities. It can be a great strategy to combat inflation at retirement.

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