Festivals lead to Artificial Inflation??!! Know it all!!!

The festivals are the celebrations of life. Specially in a country like India, people represent their cultures through these festivals. To break the monotony of life, sure these festivals have to be extravagant to make them different from the mundane. This article will analyze how and why things work, the way they do, when the festive mood is high!!!

Hello Dear Readers!!! This is not a new article but an updated one. Hope you have a happy, safe and prosperous festivals ahead.

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October-November is the time of the year when Indians loosen up their wallets. Dussehra, Deepawali, Christmas, New year; we all wait for that festive period. Well! November-December is pretty much the time when the rest of the world enters a shopping spree too with the Black-Friday sales. The amazingly crazy sales which make you believe that you need to update and upgrade your wardrobe leads to an economic scenario- artificial inflation.

What is artificial inflation?

Inflation is itself tricky. A new term ‘ARTIFICIAL INFLATION’ has been coined to describe inflation through the increase of the money supply. You might find different opinions on this from different economists. However, the conclusion of every economist will be, ‘it is a kind of inflation which is temporary and is not based on shifting needs and wants, but inflation that is created by increasing the supply of money so that the allocation of that money is altered

Mechanism of artificial inflation

Salaried people earn bonuses and incentives during the festive seasons which adds to their existing income. This leads to an increase in the money supply. The higher the income, the higher will be the consumption expenditure; because the purchasing power increases.

We know, MPC + MPS = 1. Generally, in case of most consumers or rational individuals, MPC> MPS; which implies that as income increases, their consumption expenditure increases more than proportional to savings. In simple words, an individual will spend more than he used to prior to his bonus.

Now, when people are spending or are willing to spend more, demand-pull inflation is visible. The economy reaches a state where the aggregate demand of the products outpaces the aggregate supply of these products. In other words ‘too much money chasing too few goods’. The economy thus asserts Demand-pull inflation during the festive season.

Supply and demand for commodities are quite evident during festive seasons. Time plays an important role in this. Sellers know that shoppers will often put off shopping until and unless it becomes an urgency. last day sale? limited stocks? People fall for these marketing strategies very easily not realizing that there will be numerous times when these so-called “offers” will be back again. The urgency of the good or not being able to postpone a purchase makes the good pretty much inelastic. As a result, all last moment shopping is done at a higher price.

During the festive seasons, firms plan strategies to make us spend more even when we don’t intend to. Everybody must have witnessed sales that say ‘buy 3 t-shirts and get 1 free’ and many of us fall for such marketing strategies. But the truth is, there is no such thing as free lunches in this world. They are basically, selling off their old stock with reduced profit margins. This psychology of a consumer falls under behavioral economics that provides a framework to understand when and how people make errors while taking rational consumer decisions.

Advertising is an invasive aspect of modern society. It is very common all-round the year but the intensity increases during the festive seasons. Sales, discounts, marketing via advertisements. However, marketing through advertisements leads to a deadweight welfare loss. The cost of advertisement is borne by the consumer. The consumer pays a higher price for the same product with the same quality.

Any research article is incomplete if the researcher is not able to provide some viable data asserting the research work.

Despite having a slow economy and a dip in the Gross Domestic Product of India in the last quarter, Indian festivals provided a respite to the Indian economy. A sector that enjoyed majorly during the festive season was the e-commerce sector. Last season, India witnessed a face-off between the biggest competitors in the e-commerce sector — Amazon & Flipkart. Flipkart claimed that their sales doubled when compared to the previous year during the festival season, while Amazon didn’t comment on its overall sales but stated about a 150% increase in sales in the smartphone category & a 3.7 times sales rate in the large appliances category.

So much said, it is important to add another crucial point to this article. The created inflation also creates a repercussion which in turn creates temporary job opportunities. The firms would need more workers since the production process increases, more sells-men to sell the products, delivery boys to deliver the items ordered online, and many more other employments which add to our GDP.

We would like to conclude by stating that artificial inflation is here to stay for a lifetime, but being the consumers we should know why and how things are working around us.

Ne Sois Pas Ignorant (Don’t be ignorant) !!!

Article written by:

Anushka Kumari, B.A. Economics, Arka Jain University. She has prospective speaking skills and aspires to be a successful economist.

EDITOR: EDITED BY THE TEAM OF ECOFUNOMICS.