The Clinton Gazette

Business News and Analysis

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Inflation And Its Causes

In the economic parlance, inflation is the rise in the prices of goods and services. People often wonder about the reasons that make the prices fluctuate. Many older people keep comparing the prices with what they paid years ago. They compare the price of a burger or a bag of flour and always complain about the rising prices.

It amazes everyone and this is a complicated topic for financial experts also. When there is a constant increase in demand due to growing population and the supply is also keeping up due to innovative methods of production and improved quality of production in every area from farming to manufacturing, then why should the prices of commodities increase constantly over the years?

Causes of inflation

If you want to understand the reasons behind inflation, then we need to explore how the economy works.

  1. The first reason is, of course, increased demand that cannot be fulfilled by the existing supply. It takes a little time for the supply to reach the level of demand.
  2. A sudden event can change the number of goods supplied in the market. For example, a natural calamity might damage the crops in an area and the prices of grains and other essentials may go up. But this should be a periodical change and the price may come back to the previous levels once the supply is stabilized.
  3. Sometimes the effect of one event may be carried forward and the built-in inflation may continue.

Inflation is difficult to get rid of

This is a vicious cycle. Once the inflation goes up then there are times when people stop buying certain things, this, in turn, may create an over-supply for some time. Then the people involved in their production suffer losses and may lose jobs or stop producing them. This may reduce the available money in a particular part of society.

On the other hand, when the demand goes up slowly even then the prices remain high and the working class people fight for higher wages as they are not able to afford the higher prices of essential goods. Big companies try to pass on the burden of production and high wages of employees to their customers through increased prices.

Sometimes the government policies may also affect the inflation at times of an emergency or war like situations the prices of goods may increase due to scarcity and more currency may be printed, which may compound the problem as seen in many countries. Thus we can see that there are myriad reasons and some are mentioned here. It affects the economy and a community and country at all levels.


Arbitrage – The Perfect Opportunist

Arbitrage is the buying and selling of an asset simultaneously to gain profits from the difference in prices of similar assets or securities in different trading platforms.

A simple instance in our daily life can be used to illustrate this scenario. The bullion market can be quoted as a good example. Gold has different prices at different locations. So a trader can buy gold at one location where say 10 gms will cost him Rs 25,000 and sell it at a different location where the price is Rs 25,300. Therefore he stands to gain Rs 3000 risk-free profit. The trader stands to gain only if the profit is more than the costs involved to carry out this transaction (both purchase and sale)

Why is it referred to as an Opportunistic activity?

Arbitrage works due to the imperfections/inefficiencies that exist in the market. It takes advantage of the inefficient pricing of similar financial instruments in similar or different markets. Arbitrage opportunities are often short-lived and will end once the faulty pricing or situation is corrected. Hence it can be referred to as an opportunistic activity.

Types of Opportunities

  • Currency Arbitrage – This is a strategy applied in forex trading. This involves taking advantage of variations in currency quotes given by different brokers or banks.
  • Uncovered Arbitrage – This arbitrage looks out for changes or fluctuations in the currencies and tries to take advantage of the appreciations in the currency value.
  • Time Arbitrage – This arbitrage happens when there is a drop in the stock price of certain securities. When there is selling spree due to a temporary fall in stock price, there are investors who believe in their long-term value, purchase these securities to benefit from it in the long run.

The different types of arbitrage are many depending upon instruments involved or specific situations or reasons that cause imperfections in the market. We also have political arbitrage, fixed income arbitrage and so on.

Likelihood of Arbitrage

This strategy definitely yields a risk-free profit but it is very rare to find such instances. In today’s financial market where everything is highly automated and the instances of errors or inefficiencies are limited, the chances or arbitrage are minimal. Even if exits, it will be rectified almost instantly. A day trader looking to maximize his profits will be able to identify these opportunities immediately but it will also be wiped off in few minutes or seconds.

Win-Win Strategy

This strategy is essential to ensure efficient functioning of the financial markets. Any faults or discrepancies in pricing will be noticed and rectified. Thus arbitrage brings about a win-win situation where the trader benefits from the price difference and also leads to market efficiency.