Inflation and Its Effect on Retailers

Topics: Inflation, Money, Quantity theory of money Pages: 6 (1729 words) Published: October 5, 2012
's Inflation and its effect on Supply Chain Industry (Retail) By Kamal Deep Introduction

This white paper details out how inflation is affecting the Retail economy and its health. This paper also suggests what care needs to be taken by the Retailers for tackling inflation. Purpose of this Project

For applying the Macro Economics class room learning’s practically Scope of this Project
Inflation effects are discussed only for Retailers in Supply Chain domain. Evaluating effects on Retail industry by Inflation (Demand pull, Cost push), Deflation is in scope of this project. About Inflation:

Inflation is an increase in the average level of prices for goods and services in an economy over a period of time. It represents how economy as a whole is growing. It is important indicator of the economy. Main cause of inflation is unbalancing of Supply and Demand of goods.

Visual data representation on Inflation
| Today| After 1 Year| After 10 Years|
In Pocket| 10| 10| 10|
In Bank at 5%| 10| 10.05| 25.27|
Cost of good (inflation at 3%)| 6| 6.18| 10.52|
Types of Inflation:
* Deflation: a fall in the general price level.
* Disinflation: a decrease in the rate of inflation.
* Hyperinflation: an out-of-control inflationary spiral. * Stagflation: a combination of inflation, slow economic growth and high unemployment. * Reflation: an attempt to raise the general level of prices to counteract deflationary pressures. * Depression: a severe and prolonged recession characterized by inefficient economic productivity, high unemployment and falling price levels

Measure of Inflation:
The annual rate of inflation is calculated for any year by subtracting the base year index from the current year index and dividing that difference by the base year index. Then multiply that figure by 100 to express rate of inflation as a percentage.

Rate of inflation= ((Index of the yr- Index of the base yr)/ (Index of the base yr.)) × 100 The index numbers usually used are CPI and WPI. India uses WPI for the purpose. The base year may be any previous year of the economy. The year selected as base year is usually selected in which no unusual happenings were there.

Causes of Inflation
There are many reasons as to why an economy can experience inflation. * One reason is the demand-pull theory, which states that all sectors in the economy try to buy more than the economy can produce. Shortages are then created and merchants lose business. To compensate, some merchants raise their prices. Others don't offer discounts or sales. In the end, the price level rises.

* A second reason is the deficit of the RBI. If the RBI expands the money supply to keep the interest rate down, the deficit can contribute to inflation. If the debt is not monetized, some borrowers will be crowded out if interest rates rise. This results in the deficit having more of an impact on output and employment than on the price level. * A third reason involves the cost-push theory which states that labor groups cause inflation. If a strong union wins a large wage contract, it forces producers to raise their prices in order to compensate for the increase in salaries they have to pay.

* Finally, another reason for inflation is excessive monetary growth. When any extra money is created, it will increase some group's buying power. When this money is spent, it will cause a demand-pull effect that drives up prices. For inflation to continue, the money supply must grow faster than the real GDP

Effects of Inflation and Deflation on Retail industry:
Base point is high inflation is having a direct adverse effect on their customers, which is leading to a more difficult demand environment for retailers. Effect of Inflation (Demand Driven):
Demand-pull inflation occurs when there is an increase...