Impact of Inflation on Price of Gold

What is inflation?

Inflation is what you notice when the cost of everyday things slowly starts creeping up. Maybe your favourite snack was Rs. 20 last year and now it is Rs. 25. Nothing about the snack changed—only your money buys a little less than before. That shrinking buying power is inflation.

In India, we track inflation through the Consumer Price Index (CPI). CPI looks at the prices of essentials like food, rent, transport, and healthcare to see how much they have gone up. When CPI keeps rising, it means inflation is increasing. Understanding inflation helps you make sense of why your expenses grow, even when your lifestyle stays the same.

Causes and impact of inflation

Inflation, the gradual increase in prices of goods and services over time, is influenced by various factors and has significant impacts on economies and individuals alike.
 

Causes of inflation include:

1. Demand-pull inflation: When demand for goods and services exceeds their supply, prices rise due to increased competition for available resources.
2. Cost-push inflation: Rising production costs, such as wages or raw materials, lead to higher prices for finished goods.
3. Monetary factors: Expansion of the money supply by central banks through policies like quantitative easing can lead to excess money chasing the same amount of goods, resulting in inflation.
4. External factors: Events like natural disasters or geopolitical tensions can disrupt supply chains and cause shortages, leading to price increases.

Impact of inflation 

The impact of inflation can be both positive and negative:
 

Positive impacts:

• Encourages spending and investment in the short term.
• Reduces the real value of debt, benefiting borrowers.
• Promotes economic growth when moderate.

Negative impacts:

• Reduces purchasing power, leading to a decline in the standard of living for consumers.
• Uncertainty and volatility in financial markets.
• Can erode savings and fixed incomes, particularly affecting retirees and low-income households.

Understanding the causes and effects of inflation is crucial for policymakers, businesses, and individuals to make informed decisions and mitigate its adverse effects on the economy and personal finances.

Quick tip: As gold prices change with global trends, knowing your borrowing capacity can help you stay prepared. Check your gold loan eligibility to know how much you can borrow today.
 

How does inflation affect gold price?

Inflation affects the price of gold in various ways. Gold is often seen as a hedge against inflation because its value tends to increase when the purchasing power of fiat currencies declines due to inflationary pressures. As the general price level of goods and services rises, investors seek assets that can preserve their value over time. Gold, with its limited supply and intrinsic value, becomes more appealing during inflationary periods as a store of wealth. Additionally, central banks may implement expansionary monetary policies to counter inflation, such as reducing interest rates or engaging in quantitative easing, which can weaken fiat currencies and prompt investors to turn to gold as a safe haven asset. Overall, inflation diminishes the value of paper currencies, driving investors towards gold as a dependable store of wealth and consequently increasing its price.

Additional Read: What is the gold inflation rate