The Banking Executive Magazine - July 2022 Issue

Back to Basics ply is less than the demand, lead- ing to an increase in prices and in- flation. • Exports: In an economy, the total production must fulfil the domestic as well as foreign demand. If it fails to meet these demands, then ex- ports create inflation in the domes- tic economy. • Trade Unions: Trade union work in favour of the employees. As the prices increase, these unions de- mand an increase in wages for workers. This invariably increases the cost of production and leads to a further increase in prices. • Tax Reduction: Sometimes, gov- ernments reduces taxes to gain popularity , this causes more money in the hands of people. However, if the rate of production does not increase with a corre- sponding rate, then the excess cash in hand leads to inflation. • The imposition of indirect taxes: Taxes are the primary source of revenue for a Government. Some- times, Governments impose indi- rect taxes like excise duty, and Value Added Tax VAT on busi- nesses. As these indirect taxes in- crease the total cost for the manufacturers and sellers, they in- crease the price of the product to have a minimal impact on their profits. • Price-rise in the international mar- kets: Some products require to im- port commodities or factors of production from the international markets like the United States. If these markets raise prices of these commodities or factors of produc- tion, then the overall production cost increases too. This leads to in- flation in the domestic market. • Non-economic Reasons: There are several non-economic factors which can cause inflation in an economy. For example, if there is a flood, then crops are destroyed. This reduces the supply of agricul- tural products leading to an in- crease in the prices of the commodities. Investment in gold, real estate, stocks, mutual funds, and other assets are some of the ways to deal with Inflation. INFLATION METRICS There are a few metrics that are used to measure the inflation rate. One of the most popular is the Consumer Price Index (CPI), which measures prices for a basket of goods and serv- ices in the economy, including food, cars, education, and recreation. Another measure of inflation is the Producer Price Index (PPI), which re- ports the price changes that affect domestic producers. The PPI meas- ures prices for fuel, farm products ISSUE 163 JULY 2022 the BANKING EXECUTIVE 41