Archive for August 7th, 2009

Relation Between Price and Inflation – How ?

Relation Between Price and Inflation

There is always a direct relation between prices of certain commodities and inflation. 🙂

Let’s take the price of oil. This and inflation are connected in a cause and effect relationship.

As oil prices move up or down, inflation follows in the same direction. 🙂

🙂

The reason why this happens is that oil is a major input in the economy – it is used in critical activities such as fueling transportation – and if input costs rise, so does the cost of end products.

🙂

For example, if the price of oil rises, then it costs more to make plastic, and a plastics company then passes on some or all of this cost to the consumer, which raises prices and thus – inflation.

🙂

To understand inflation, we must first understand what the word means.

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

🙂

When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.

A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

🙂

As inflation rises, every rupee you own buys a smaller percentage of a good or service.

The value of a rupee does not stay constant when there is inflation.

This value is seen by looking at its purchasing power, i.e. the real, substantial goods that money can buy.

🙂

Because inflation is a rise in the general level of prices, it is intrinsically linked to money, as captured by the often heard refrain “Inflation is too many dollars chasing too few goods”.

Now if demand for goods and services doesn’t fall as much, then price of goods and services go up.

Hence the retail price index goes up, and inflation takes place. 🙂

Inflation does NOT however mean an increase in the general price level of goods and services within a country.

What inflation actually means is an inflation of the money supply, i.e. an increase in the total number of rupees in circulation.

An increase in the price level is a normal consequence of inflation because it depreciates the currency, lowering each rupee’s purchasing power.

🙂

Prices and inflation

When inflation comes down, prices in the market do not come down immediately. The reasons may be many. Inflation comes down due to

* fall in consumption,

* low industrial output,

* fall in industrial commodity prices, especially crude, steel, etc.,

and

* industrial slowdowns.

🙂

Market prices for ordinary citizen are not like that.

When supply is more than demand, industries slow down the output and the prices go up.

When inflation is down RBI reduces the interest rate, prime lending rate, etc., which increases liquidity in the economy.

Excess money is then often used for speculation with traders cornering the stock and creating artificial scarcity, thereby increasing the prices or not letting it come down.

🙂

In conclusion, inflation will always be with us; it’s an economic fact of life.

It is not intrinsically good or bad, but it certainly does impact our lives.

Everyone knows, once the prices go up they stay up and never come down.

It has no meaning to common man if it does not translate into reasonable living standards.

🙂

There is always a direct relation between prices of certain commodities and inflation. Let’s take the price of oil. This and inflation are connected in a cause and effect relationship. As oil prices move up or down, inflation follows in the same direction. The reason why this happens is that oil is a major input in the economy – it is used in critical activities such as fueling transportation – and if input costs rise, so does the cost of end products. For example, if the price of oil rises, then it costs more to make plastic, and a plastics company then passes on some or all of this cost to the consumer, which raises prices and thus – inflation.

To understand inflation, we must first understand what the word means.

Inflation is an increase in the price of a basket of goods and services that represents the economy as a whole. It is an upward movement in the average level of prices, measured as an annual percentage increase. As inflation rises, every rupee you own buys a smaller percentage of a good or service.

The value of a rupee does not stay constant when there is inflation. This value is seen by looking at its purchasing power, i.e. the real, substantial goods that money can buy. Because inflation is a rise in the general level of prices, it is intrinsically linked to money, as captured by the often heard refrain “Inflation is too many dollars chasing too few goods”.

This is not difficult to follow. Imagine a world with two commodities: Mangoes picked from mango trees, and paper money printed by the government. In a year where there is a drought and mangoes are scarce, the price of mangoes rise, as there is substantially more money chasing very few mangoes.

Now if demand for goods and services doesn’t fall as much, then price of goods and services go up. Hence the retail price index goes up, and inflation takes place.

Inflation does NOT however mean an increase in the general price level of goods and services within a country. What inflation actually means is an inflation of the money supply, i.e. an increase in the total number of rupees in circulation. An increase in the price level is a normal consequence of inflation because it depreciates the currency, lowering each rupee’s purchasing power.

Prices and inflation

There is always a direct relation between prices of certain commodities and inflation. Let’s take the price of oil. This and inflation are connected in a cause and effect relationship. As oil prices move up or down, inflation follows in the same direction. The reason why this happens is that oil is a major input in the economy – it is used in critical activities such as fueling transportation – and if input costs rise, so does the cost of end products. For example, if the price of oil rises, then it costs more to make plastic, and a plastics company then passes on some or all of this cost to the consumer, which raises prices and thus – inflation.

However, even when inflation comes down, prices in the market do not come down immediately. The reasons may be many. Inflation comes down due to

* fall in consumption,

* low industrial output,

* fall in industrial commodity prices, especially crude, steel, etc., and

* industrial slowdowns.

Market prices for ordinary citizen are not like that. When supply is more than demand, industries slow down the output and the prices go up. When inflation is down RBI reduces the interest rate, prime lending rate, etc., which increases liquidity in the economy. Excess money is then often used for speculation with traders cornering the stock and creating artificial scarcity, thereby increasing the prices or not letting it come down.

In conclusion, inflation will always be with us; it’s an economic fact of life. It is not intrinsically good or bad, but it certainly does impact our lives. Everyone knows, once the prices go up they stay up and never come down. Negative inflation has no meaning to common man if it does not translate into reasonable living standards.

Exit Bharti Airtel: SMC Global

an Interview with Rajesh Jain

Excerpts from an Interview with Rajesh Jain, Research Head of SMC Global.

Rajesh Jain of SMC Global giving a technical perspective about the market moves, portfolio and related factors.

🙂

Q. I hold a few Bharti Airtel shares @ Rs 428. What should I do?

Jain: The stock is good. It had a fantastic run since 2004, but after the bull run, it underperformed. If you are a long-term investor, you should diversify and invest in infrastructure. 🙂

Q. I hold 100 Tata Motors shares @ Rs 305. Should I hold?

Jain: I think you should book profits, because it will take some time for the company to pick up volumes and come out of its interest burden.
For that, there should be a revival in the overall market.
Till that time, I don’t think the company will be able to compete with players like Maruti and Mahindra & Mahindra.

🙂

Q. I hold a few Adani Enterprises shares @ Rs 820. My investment horizon is 5 years. Should I hold?

Jain: You need to have a lot of patience. I would say keep some stop-losses and diversify your investment. 🙂

Q. I have 500 Indiabulls Real Estate shares @ Rs 245. What should I do?

Jain: For this stock, Rs 250-260 is a good resistance zone. On the lower side, Rs 220-230 is a good support zone.
It is consolidating between these levels.
The day it closes above Rs 260, you can set a target of Rs 290.
On the lower side, if it breaches Rs 220, it will be bad.
So, keep a stop-loss of Rs 220 and wait for a target of Rs 290.

🙂

Q. I hold 2000 Ispat shares. What should I do?

Jain: I am not so buoyant about Ispat. Though we have seen a bull cycle for four years and a correction for two years afterwards, this is one stock which has not moved up too much.
Big companies like SAIL have not shown too much of a strength either.
If the giants have not shown good performance, I don’t think companies like Ispat can show better results.
Performance-wise also, it has accumulated losses.
It needs a lot of time to come out of the accumulated losses.

🙂

Q. What should I prefer? RIL or Tata Steel?

Jain: I will go for Tata Steel, because the commodity bull cycle is going on, and, as commodity guru Jim Rogers says, the next cycle is commodities.
In the short term, RIL may be able to do well and Tata Steel may not do that well.
Overall, I am bullish on commodities. I think Tata Steel would be a better bet. 🙂

Q. I hold 500 Indian Hotels shares @ Rs 79. My investment horizon is 1-2 months. What should I do?

Jain: This stock is a defensive play.
When the market is in an aggressive mode, defensive stocks generally lag around.
I would say you will have to wait till the Rs 79 levels. It has a huge resistance at the Rs 80 levels. You need to have a lot of patience with this stock. 🙂

Q. I have short listed Nestle, Hero Honda, L&T. Where should I put my money?

Jain: These are excellent companies.
I would suggest you to go for all the three as they will beat inflation and you will get good returns in the long term. 🙂

🙂

Q. Can you guide me through some auto ancillary stocks?

Jain: The segment has started showing revival. I think one can go for Sona Koya.

🙂

Source : http://www.utvi.com/stock-market/stock-market-news/28377/exit-bharti-airtel–smc-global.html