In simple terms, you could have purchased 1 kg of Mango in 2013 for Rs 100, now the same quality mango comes for Rs 150, leading to a 50% increase in cost i.e. 5.5% per year cost increase, also called inflation.
Why does this happen?
Demand Pull
When too many people demand more because they could afford to spend more. As a result, the prices of products go up.
Supply Push
When the supply of product goes down. Supply-side factors could be due to the outbreak of war, poor weather, increase in labor prices, etc.
Is inflation good or not?
Is inflation good or not? A simple answer is that inflation should be there but at a moderate level.
High inflation will make the overall economy tremble. Everything will start to become expensive. The central bank will have to increase interest rates to tame inflation but the cost will be a sluggish, slow-growth economy.
Similarly, if the inflation is zero, the central bank will run out of policy-level level tools to boost the economy. A central bank can boost the economy by decreasing interest rates. But if the inflation is close to zero, RBI will not be able to boost the economy.
A good state is to have 3-5% inflation in the economy so RBI can manage inflation better.
As an individual, we can manage inflation by working on our skills. High inflation will not cause any problems for doctors, lawyers, consultants, etc. So invest time and effort to deal with inflation by acquiring high skills so that you can command better compensation or fees. This will easily take care of inflation scenarios.
The other option that helps in beating inflation is to allocate cash flows towards growth assets such as equities or real estate.