Saturday, July 5, 2008

Inflation

There is so much humdrum going on about the price rise lately, I thought I would try and understand wht it is all actually about.


So here are my findings:

1. The latest inflation rate has been calculated to be 11.63% , up by a whopping 3% in the past three to four months from 8%.
2. The inflation rate is always calculated in hindsight, that is for the trading and businesses that have taken place a few weeks ago. So this latest figure is for the week beginning June 21
3. The inflation rate is the percentage change in the prices of goods and services. Basically i think it kinda indicates how much more money we pay for goods/services than their actual cost.

Then, what is it that drives this increase in the cost??

Well, The cost goes up because the cost of the input raw material goes up, which in turn goes up because a lot of the raw materials for a wide range of industries are imported. The fuel cost and the strength of the foreign currency involved drives the price of the raw material.

So it all boils down to the cost of the fuel which drives the price rise.

As we all know, the price of crude oil in the markets have risen to $144 a barrel, whereas it was not so bad just a few weeks ago. The sharp rise in the oil prices has been not so much because of corresponding increase in demand

Nor is it because the oil producing nations are asking for more money for the oil

It is primarily due to something called futures trading taking place in an unregualted manner. Futures trading is done by special traders called speculators. Speculators only speculate, that is they dont actually buy anything.

Futures trading is about betting your money on a particular good and fixing its price in advance. If the actual price at the later date reduces, then the producer of the commodity is insulated from it, and he gets the price agreed upon earlier. And the vice versa.

Speculation over specualtion has resulted in the current state of the oil prices. I wonder when this will "deflate". Because as long as it doesnt, my dreams of buying a Honda city shall be put on hold.

So long.

P.s. this post may not really enlighten you about the trading market, still it will give you a "clear" picture of the great confusion the market actually is :D