What is Inflation?

What is Inflation and how do we handle it?

Inflation is a state where costs of goods and services are elevated, depending on each country, consequently decreasing purchasing power. The increased rates of cost are required to be gradually maintained, rather than an accelerated rate over a set period of time. We’ll show you an example of the difference between past and current situations.



In the past, the price of a pack of chips was 5 baht, but, over time, it changed to 10 baht. Also, we rarely get a meal within a price limit of 40 baht or less. Price levels seem to be climbing up unnoticed until you compare the prices. We can say that Inflation also yields both advantages and disadvantages at the same time, why don’t we take a look through them together?





Causes of Inflation



At its starting point, inflation can take place due to the functioning of the economy’s mechanism, whether it's in terms of money supply, demand, or supply inside the market. Inflation can be diversified into 3 main types; Cost-push Inflation, Demand-pull Inflation, and Built-in Inflation.

Cost-push Inflation



Cost-push inflation takes regard to production cost which can be expanded over time, depending on various indicators, such as the cost of resources used in the production process which can be changed according to the fluctuation of supply and demand. Essentially, if supply increases, prices will go down.



Demand-pull Inflation



Demand-pull Inflation can occur when demand is exceedingly more than supply in the market. When an economy is growing exponentially, the factor of demand is effectively elevated as people are willing to spend more on all the goods and services.



After Coronavirus (Covid-19) had spread around the world in early 2020, most of the population chose to spend more time at home, which indeed has its limitations. The popular gaming console, Nintendo Switch's, offered games like Ring Fit Adventure, which attracted those who wanted exercise during the pandemic in a safe environment, resulting in a surge of demand. Various types of protective masks have also highly increased in price, due to the supply shortage as people which resulted from stock of supplies. 





Built-in Inflation



Built-in Inflation is an occurrence that combines 2 variants of inflations together.



This type of inflation raises production expenditures continuously, also known as the price-wage spiral, causing inflation to be higher than usual. Once costs are revved up, all of the burdens will be directly passed on to consumers. 





Pros and cons



Inflation might seem to be a negative incident, however, it does attain its advantages and disadvantages. Let’s have a look.

A benefit from inflation is that if a country can reasonably manage the increased inflated rates through certain limits, it can positively stimulate the economy’s overall status. As people acknowledge the effects of inflation, they are more willing to invest, pay or even loan more to increase the value of the money they are holding. 



Once the economy returns to a stable state, proprietors can adjust the profit from products in preparation for upcoming economic inflations, which would also be beneficial, in terms of how they would be able to apply promotional campaigns to products, which would positively influence the economy.

Inflation in cryptocurrency



Occurrences of inflation in cryptocurrency can be both positive and negative. However, the differentiating effect is that, due to the volatility of cryptocurrency, investors are rendered to question whether or not they should invest in cryptocurrency, wherein inflation rates can be much more influential. 



Let’s say you gained a profit of 5 percent after investing in cryptocurrency, if inflation increased by 6 percent during that time, you would only lose 1 percent of the value of money you were previously holding. Therefore, factually, investing has been advised in the crypto community as it can provide benefits, rather than just letting assets devalue by 6 percent.



An additionally interesting point is that Venezuela, a South American state, used to be one of the largest oil exporters in the world, but chose to create its own digital currency in order to control hyperinflation rates. Moreover, in recent times, the public has been paying attention to Bitcoin,  questioning whether it’ll become inflated as well. We could technically agree as new Bitcoin coins are mined, the only mechanism that is stopping it from rising inflation is the Halving process. This process was designed to cut out 50 percent of the newly mined coin rewards every 4 years to control inflation rates from stepping up too high. 





Conclusion



Even though inflation is a phenomenon that causes prices to rise every year, we have to admit that if inflation can be controlled efficiently, it would benefit the economy. Countries with good signs of economic growth are slightly more inclined to continuously provide better quality of life for their citizens.



Reference



Investopedia, Binance Academy, Wikipedia