The Effects of Inflation
Effects of Inflation
Inflation is not considered bad so long as it creates additional
employment to the factors of production. It becomes bad the moment it
goes out of control. Inflation may be compared to a robber. It
deprives the victim of some possession with the difference that robber
is visible, inflation is invisible. The robber's victim may be one or
a few at a time. But the victim of inflation is the whole nation. The
robber may be dragged to a court of law but inflation is legal.
Inflation disrupts the economy and paves the way for social and
economic upheavals, besides being highly demoralizing.
The entrepreneur faced with the demand for higher wages and trying to
keep up with such a demand, a retired person trying to manage his
living on a fixed pension, a person with fixed income meeting his needs
of household expenditure by borrowing from banks and other financial
organizations, and the housewife struggling hard to serve food in a
period of rising prices are aware of the effects of inflation with out
being told about it.
Effects of inflation on distribution: Inflation has the effect of
redistributing income because prices of all factors do not in the same
proportion. Entrepreneurs stand to gain more than wage earners or
fixed income groups. Speculators, hoarders, black marketers and
smugglers gain on account of windfall profits. Change in the value of
money also result in the redistribution of wealth, partly because
during inflation there is no uniform rise in prices and partly because
debts are expressed in terms of money. Inflation is a kind of hidden
tad, highly harmful to the poorer sections of society. Thus, poor
become poorer.
Effects of inflation on wage earners: Wage earners generally suffer
during inflation, despite the fact that they obtain a wage rise to
counter the rise in the cost of living. However, wages do not rise as
much as the rise in price of those commodities which the workers
consume. Further, wages are allowed to rise much later than the rise
in prices. Thus, there is a lag between the two, which works to the
disadvantage of the worker. If the workers are organized, they may not
suffer much during inflation but if they are unorganized like the
agricultural laborers they may suffer more as they may not find it easy
to get their wages increased.
Effects of inflation on middle class and salaried persons: The
hardest hit are the persons who receive fixed income, usually called
the middle class. Persons who live on past savings, fixed interest or
rent, pensions, salaries etc., suffer during periods or rising price as
their incomes remain fixed. The middle class who by hard work take
care of children's education, livelihood in the times of sickness and
old age and accommodate day to day expenses find it difficult to
survive the times of serious inflation.
Effects of inflation on public morale: inflation result in arbitrary
redistribution of wealth favoring businessmen and debts, and hurting
consumers, creditors, petty shop-keepers, small investors and fixed
income earners. This lowers the public morale. The ethical standards
and the public morale falls to miserably low levels during the period
of hyper-inflation.
Effects of inflation on debtors and creditors: Debtors borrow from
creditors to repay with interest at some future date. Changes in price
level effect them differently at different time periods. During
inflation when the prices rise and the real value of money goes down,
the debtors pay back less in real terms than what they had borrowed and
thus, to that extent they are gainers. On the other hand, the
creditors get less in terms of goods and services than what they had
lent and lose to that extent.
Effects of inflation on Farmers: The price of farm products go up
faster than costs. Costs lag behind prices of product received by the
farmers. It has been observed in India that inflationary tendencies
during war and post-war periods have helped farmers in paying off their
old debts. Moreover, farmers are generally debtors and have to pay
less in real terms, while the land revenue, taxes, etc., do not rise
much. Thus farmers generally gain during the periods of inflation.
Effects of inflation on the entrepreneurs: When prices rise,
producers, traders, speculators and entrepreneurs gain on account of
windfall profits because prices rise at a faster rate than the cost of
production. Besides, there is time-lag between the price rise and the
increase in cost. Moreover producers gain because the prices of their
stock go up due to inflation. Also they generally being borrowers of
money for business purpose, stand to gain.
Effects of inflation on Investors: Different kinds of investors are
affected differently by inflation. An investor may invest in bonds and
debentures which yield a fixed rate of interest or in real estate or
equities (shares) whose returns (dividends) rise and fall with profits
earned by the companies concerned. When prices rise, the returns on
equities go up on account of the rise in profits, while the bond and
debenture holders gain nothing as their income remains fixed. By the
same logic, holders will lose during depression, while the debenture
and bond holders gain.
Effects of inflation on Government: In a mixed economy, the public
sector is affected by fluctuations in price level. As prices rise, the
Government has to spend more on goods and services, including raw
materials, for carrying through their projects. Estimates are revised
and taxes are raised during the period of inflation.
