The value of a currency does not stay constant when there is variation in inflation. The value of a currency is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 7% annually, then theoretically a Re.1 cost an item now will cost Re. 1.07 in a year. After inflation, your currency can't buy the same goods it could beforehand. In short for an ordinary man the cost of living will go up proportionately, you need to pay more money to buy same quantity of the goods you purchased earlier.
Demand-Pull Inflation - This is simply can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies. In short people have lot of surplus money in their hands but the supply of the goods is limited.
Cost-Push Inflation - When manufacturing costs go up, companies need to increase prices of the goods to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports etc. This can also case due to the increases in the bank rates by RBI. In that case companies needs to pay more on account of interest payments for the loan they availed from the banks for business purposes.
Result of Inflation
Inflation affects different people in different ways. It also depends on whether inflation is anticipated or unanticipated. If the inflation rate corresponds to what the majority of people are expecting (anticipated inflation), then we can compensate and the cost isn't high. For example, banks can vary their interest rates and workers can negotiate contracts that include automatic wage hikes as the price level goes up.
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