close Business Finance Invest Bullets Most Viewed
close
Business

What if There Was No Inflation?

Created on 16 Nov 2024

Wraps up in 8 Min

Read by 477 people

Updated on 19 Nov 2024

What if There Was No Inflation?

“Mehangai kitni badh gai hai! Humare samay me ₹10 me petrol milta tha”.

Ever heard your grandparents say something like this? I certainly have. And like most people, I used to think that this “badhti mehangai"—or inflation—was a villain in the story of our economy.

But it turns out I was wrong. Inflation isn't actually the bad guy; it’s more of a necessary evil or even a misunderstood hero in disguise.

Yes, inflation eats into our purchasing power, but it’s also a sign of a growing, evolving economy. We’ll see proof of it throughout the article. So what if there was no inflation? Would you be able to buy a whole litre of petrol for ₹10? Let’s take a look at this alternate universe and find out.

But First, What is Inflation?

When you hear "5% inflation rate," it means, on average, prices are 5% higher than they were a year ago. So, if you bought something for ₹100 last year, it would cost you ₹105 this year on average. This happens because demand for things grows faster than supply, or the cost of making stuff rises, like wages or materials.

Inflation is the gradual increase in prices of goods and services over time. You can simply call it the reason why a cup of tea that cost ₹5 a decade ago now costs ₹20.

Every nation has its own inflation story. Let's see a few examples. As of November 2023, Venezuela has an inflation rate of 283%, making everyday items astronomically expensive. While China has an inflation rate of -0.5% meaning prices have been falling slightly. India sits somewhere in the middle, with an average inflation of 5.3% over the last 6 years.

Inflation rate by country
Source: World Population Review

Both these extremes come with problems. Too much inflation (hyperinflation) can make basic needs unaffordable, while too little (deflation) can freeze spending and stall economic growth.

Inflatio rate in India

This rate of inflation is actually quite normal for a developing country. Since India’s economy is rapidly growing, frequent price hikes are almost inevitable. The Reserve Bank of India (RBI) has set an inflation target of 4% for India, with a tolerance of +/– 2% around it. This means that inflation can be as low as 2% or as high as 6% while still being considered acceptable.

So, while inflation can feel like an annoying phenomenon, it’s actually a sign that things are moving forward.

But what if inflation just stopped? What would that world look like?

A World With Zero Inflation

Imagine if prices stayed the same, year after year. This might sound like a dream come true. After all, who wouldn’t love to go back to 2003 when petrol was ₹33.49 per litre, and the price of 10 grams of 24k gold was just ₹5,600? But, this situation might not be as ideal as you may expect.

Here's how zero inflation will impact different aspects of the economy:

a. Purchasing Power and Wages

You might think a no-inflation world would be more stable, especially when it comes to purchasing power. It would mean that the value of your ₹10 would stay the same forever. That's amazing, right? Not really. Let me tell you why.

No inflation = No incentive for employers to increase your salaries. Which means no more pay hikes.

With inflation playing a major role, India's average annual income is increasing and is expected to rise by 9.8% in 2024.

india's Annual Salary Increases

Imagine a world where your salary hasn't changed in the last 20 years. Without inflation, the prices of things and your wages will be tightly locked. So, you can forget about improving your lifestyle through salary growth. And no more validation of a job well done in the form of appraisals either.

b. Investments and Returns

You probably didn't know this, but inflation plays a huge role in the overall economy and investments. Generally, it is said that if you want to beat inflation, you should invest in the stock market. This is what incentivises you to take risks and innovate.

Let me explain it with an example. Over the past 10 years, the Indian stock market has given annual returns of 10.9%. This rate is well above inflation, allowing investors to grow their wealth. However, this wealth would be of little value in a no inflation world. Why? Because companies wouldn't have the same level of growth if prices and demand stayed constant.

Know the Impact of inflation on the Indian Stock Market by reading this article.

Real estate would suffer as well. In the past 20 years, Indian property rates have risen at an average rate of 6% each year. This means that a house bought in 2004 for ₹10 lakh is worth around ₹32.07 lakh in 2024. But if there were no inflation, that house would still be worth ₹10 lakh and no more.

c. Borrowing and Lending:

Usually, people don't like the idea of borrowing money, but in a no-inflation world, it would be even less attractive. Usually, banks set interest rates based on inflation. So, for example, if inflation is 5%, then the bank might charge an 8% interest to cover inflation and make a profit at the same time. However, banks might have to reduce interest rates to near 0%, if there was no inflation. Which means little to no profit margin for lenders.

And without the money losing its purchasing power or rising incomes, the real value of debt will not decrease. This means it will be harder for you to pay your debts and grow your finances overtime.

How are Inflation & Interest Rates Related? Read the article to know that.

d. Business and Economic Growth

So much of our lives is governed by cost consciousness. We try to buy things at their lowest prices during sales or festival seasons, but if prices remain constant, people may delay spending, thinking, "Why buy now when we can buy it next year at the same price?"

In India, inflation is the reason behind such huge consumer spending. This in turn feeds the economic growth of the country.

  • Consumer spending in India increased by approximately 443.05% from 2004 to 2024.
  • India's GDP has experienced a growth of around 240.5% over the last 20 years.

As you can see, spurred by inflationary spending and rising wages, the GDP also rises. However, if there was no inflation, there would be no GDP growth either. Therefore, it will not be incorrect to say that a no-inflation economy is a no-growth economy.

How Does the Government Control Inflation? Read this article to know about it.

Isn't Inflation Painful: Impact on Economic Growth

Not quite. Take Japan for example. The country experienced a long period of deflation, or negative inflation, throughout the 1990s and early 2000s. This period was known as the “Lost Decade”.

Year

Inflation Rate 

1990

3.08%

1995

-0.13%

2000

-0.68%

2005

-0.28%

2010

-0.73%

2015

0.80%

2020

-0.03%

The 2000s were another decade lost and the country has been battling with deflation for over 25 years. During this time, Japan’s economy basically stood still. Businesses cut back on expansion, salaries stood frozen and consumer spending crashed.

Reuter newspaper clipping

With negligible change in prices, people delayed purchases. This led to a vicious cycle where businesses suffered from low demand and, as a result, profits were reduced. Since 1990, the country’s GDP has grown at an average of just 0.97%. Today, Japan’s inflation rate hovers around 2.8%, and its GDP growth remains limited to 1.92% as of 2023.

Japan's economy has barely grown. In 1990, Japan's GDP per capita was about $25,800 (₹21.76 lakh). In 2023, it's around $33,800 ((₹28.41 lakh). That's only a small increase in 30+ years. For most people, life hasn't gotten much better.

Sure, inflation means we pay more for the same goods over time. But it helps keep the economy moving. It creates jobs, encourages spending, and makes paying off loans easier over time.

However, it is only good to a certain limit. Too much inflation can also be a big problem. Venezuela is a clear example of how it can ruin an economy. Since 2013, the country has faced hyperinflation, meaning prices have skyrocketed at an unbelievable rate.

For instance, in 2018, inflation was estimated to hit over 1,000,000%, which means that something that cost ₹1 would suddenly cost ₹10,000! This kind of inflation makes it hard for people to buy basic things like food and medicine because their money loses value so quickly.

Imagine going to the store and finding that your favourite snack now costs more than your entire month’s salary! Many people in Venezuela struggle to afford even the essentials, leading to a lot of suffering and hardship.

So you see how too much inflation makes life expensive, while too little can slow down the economy. A balanced inflation rate keeps things steady and healthy for both people and businesses.

If you want to know the Ways To Beat Inflation With Investments, read the full article.

The Bottom Line

If there was no inflation, we might still be paying ₹10 for a litre of petrol, but our monthly salary would probably be the same as it was decades ago. Investments wouldn’t grow, borrowing would slow down, and economic growth would be stunted. Prices may be stable, but so would your income, lifestyle, and prospects.

In the end, inflation isn’t the enemy—it’s a natural part of economic life. Inflation fuels progress, innovation, and prosperity when managed well. And here are 6 ways to beat inflation with investments to help you do just that.   

So next time you hear someone say, “Mehangai kitni badh gai hai!” remind them that, while inflation might feel like a bad thing, it’s also what keeps the economy moving forward. After all, progress has a price, and inflation is simply part of that price we all pay for growth and opportunity.

A little bit of price rise might actually be a good thing for all of us. So, after all this, do you still wish for a world without inflation? Let me know in the comments!

You Should Also Read This:

comment on this article
share this article
Photo of Iti Goyal

An Article By -

Iti Goyal

7 Posts

33.4k Views

21 Post Likes

Iti, a graduate in MBA finance, knows her way with words. She will tell you the randomest of facts out of the blue and will make you think deeply. She's either obsessed with something or completely done with it. The only exception: Writing!

Share your thoughts

By commenting, you agree to our terms and conditions.

More Like This

Why stop? Here are articles you're bound to enjoy!

close
Share this post
share on facebook

Facebook

share on twitter

Twitter

share on whatsapp

Whatsapp

share on linkedin

Linkedin

Or copy the link to this post -

https://insider.finology.in/business/inflation-meaning-and-importance

copy url to this post
Copied