Disclaimer: This article provides knowledge to readers which does not provide any advices to readers. The writer and the company of this article take no legal responsibilities for any usage of these methods. The readers should consult their financial adviser first before implementing any financial decisions.
Inflation, in simple terms, refers to a situation where the prices of goods and services increase over a period, whether short or long. It also means that the amount of items one can purchase with the same amount of money decreases.
Understanding inflation is crucial because it impacts everyone over time. While income growth may not always keep up with inflation, purchasing power—the ability to buy goods—tends to decrease.
While inflation affects our life, to ensure everyone still enjoy with their lower purchasing power, "shrinkflation", another type of inflation, happens among the products. The goods are still available at the price but with less content. This happens in a packaged goods.
For instance, imagine a cup of coffee costing $2 five years ago. Today, that same cup of coffee would cost significantly more, illustrating how inflation affects our daily lives. This makes understanding market inflation essential, especially from three perspectives: consumers, markets, and government actions.
1. Consumers' spending behaviour
Ever wondered why prices often increase during festive seasons? This is largely due to consumers spending more on goods during these times.
When demand for goods increases while production remains fixed, fewer goods are available in the market. To manage this imbalance, prices rise to reduce excessive demand.
However, not all goods follow this trend. For non-perishable items, it’s wise to purchase them outside festive seasons to avoid price hikes. Otherwise, be prepared to face the increased costs.
2. Employee salary demands
Employees are essential to the production of goods. To retain workers and prevent them from seeking higher-paying jobs, companies may increase salaries based on performance. Sometimes, overtime work also results in additional pay obligations.
Since most company income comes from sales, meeting these salary demands may lead to higher sales targets. If sales fall short, price increases often become the last resort to balance expenses.
3. Increases in raw material costs
Raw materials are critical for producing goods. When raw material prices rise, production costs also increase. To maintain profitability, companies often pass these costs onto consumers by raising prices.
The impact of rising raw material costs creates a ripple effect throughout the economy. For example, producer-retailer relationships must remain profitable to ensure goods reach consumers. While service sectors are less directly impacted by raw materials, they’re affected by employee demands for higher wages. This compounds the cost increase for consumers.
4. High market demand
When companies need specific inputs—such as advanced machinery, raw materials for new products, or highly skilled employees—to meet high market demand, the costs of these inputs increase. Scarcity of such items further drives up costs.
To mitigate profit loss, companies adjust product prices to reflect higher production costs. This ensures they can continue to meet demand while maintaining profitability.
5. Government intervention
Governments play a significant role in controlling the prices of goods through various measures:
Subsidies: Reduce the prices of certain goods.
Incentives: Encourage consumers to purchase specific goods.
Taxes: Discourage the purchase of certain goods by increasing their costs.
Price Controls: Implement floor or ceiling prices to regulate goods at a specific level.
Both under-regulation and over-regulation by governments can influence inflation. Under-regulation may lead to profiteering, while excessive regulation can cause drastic price hikes once interventions are lifted. Severe inflation occurs when goods become scarce due to over-regulation, leaving the market with limited supplies.
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