Kavan Choksi Professional Investor Briefly Talks About Inflation

Kavan Choksi Professional Investor Briefly Talks About Inflation

Inflation implies to the rate of increase in prices over a given period of time. It generally is a pretty expansive measure, involving the overall increase in prices or the increase in the cost of living in a nation. Kavan Choksi Professional Investor, however, does point out that inflation can also be more narrowly calculated, for certain goods like food or for specific services. Regardless of the context, inflation largely represents how much more costly the relevant set of goods and/or services have become over a certain span of time.

Kavan Choksi Professional Investor provides a general understanding of inflation and its implications

The cost of living of consumers relies on the prices of varied services and goods, and their share in a household budget. Government carries out household surveys in order to identify a basket of commonly purchased items and track the cost of purchasing this basket over time, so as to measure the average consumer’s cost of living.  The cost of this basket at a given time tends to be expressed relative to a base year in the consumer price index (CPI), and the percentage change in the CPI over a span of time is consumer price inflation, which is the most widely used measure of inflation.

Core consumer inflation puts emphasis on persistent and underlying trends in inflation by excluding prices set by the government, as well as the more volatile prices of products. These products include food and energy, which are highly impacted by temporary supply conditions or seasonal factors. Core inflation is also observed closely by policymakers. Calculation of an overall inflation rate for a country requires an index with broader coverage, like the GDP deflator.

During inflation, diverse prices tend to change at varied paces. A few, like the prices of traded commodities, may change almost every day. On the other hand, wages established by contracts take much longer to adjust. This uneven rise in prices lowers the purchasing power of some consumers inevitably, and the erosion of real income is the single biggest cost of inflation.

As Kavan Choksi Professional Investor says, inflation may even distort purchasing power for recipients and payers of fixed interest rates, over time. For example, there are pensioners who receive a fixed 5 % yearly increase to their pension. In case inflation is higher than 5%, the purchasing power of these pensioners would fall. On the other hand, a borrower paying a fixed rate mortgage of 5% shall benefit from 5% inflation as the real interest rate would be zero and servicing this debt would be even easier if inflation were higher, as long as the income of the borrower keeps up with inflation. The real income of the lender obviously does suffer.

Inflation introduces uncertainty into economic decision-making. Businesses may struggle to plan for the future when the prices of inputs and outputs are unpredictable. Long-term contracts, investments, and budgeting become challenging, as the real value of money is subject to change. This uncertainty can lead to suboptimal decision-making and hinder economic efficiency.

Jimmie D. Rivera