Effects of Inflation in the Economy

Inflation has serious social and economic effects. Some economists have named it legal dacoits. It invisibly imbalance economic factors and delay the speed of economic growth. The following are the main effects of inflation.

Effects on Production

  1. Decrease in the quality of goods: The demand for goods increase due to inflation. So, any type of goods can be sold. As a result, the profit seekers lessen the quality of goods to increase the profit.
  2. Reduces saving: Due to inflation, most of the income is spent on consumption. So the saving reduces. As a result, there is less capital investment.
  3. Encourages holding and speculation: The producers start to store the necessary goods. Due to this, the goods become even scarce; the businessmen hide the goods and create artificial scarcity, for black marketing.
  4. Reduction in productivity: In the time of inflation, there is less capital formation. As a result, it is difficult to make available factors of production. It brings uncertainties in the economy, and entrepreneurs become discouraged in the production.
  5. Devaluation of money and loss in faith: People have less trust of money due to the devaluation of money and its decreasing purchasing power. Foreign investors also can return their investment due to the loss of faith.

Effects on Consumption

  1. Change in consumption pattern: In the time of inflation, the demand for quantity decrease as the price of the quantity increases. Those who have various sources of income buy luxury goods, foreign goods and goods of comfort but those who have limited source of income start to buy only essential goods. Most of the consumers start to consume artificial goods than natural ones.
  2. Debt instead of saving: In the time of inflation, the consumer surplus slowly decreases because he has to pay more than he wants to pay. If there is high inflation, he will get loan.
  3. Unequal consumption and lifestyle: In the time of inflation, the lifestyles of rich and poor will become more polarized. Those who have only limited income, is compelled to buy only the essential goods. Due to this, life becomes more difficult. But those, who have various sources of income feel opposite of that.

Effects on Distribution

  1. Fixed income groups: Government officials, pensioners and those depend on post savings are the fixed income group. In the time of inflation, general price increases, so the expenditure on living increases and the life becomes harder.
  2. Creditors and debtors: In the time of inflation, creditors are in loss and debtors are in profit because of the decrements in the purchasing power of money. As the creditor give the money having more purchasing power and get it back when it has less purchasing power. Therefore, they get in loss.
  3. Salary and wage earners’ group: This group will be in hard time as the expenditure of living increases where as wage and salary do not increase.
  4. Merchants and industrialists benefited: In the time of inflation, merchants and industrialists get sudden profit. The price of assets (stock) increase but the cost of current capital does not increase so much, so merchants and industrialists get extra profit.
  5. Effect on Balance of Payment: Inflation has negative effect on balance of payment. Indigenous goods happen to be more expensive than foreign goods. So the farmer cannot compete with foreign goods. As a result, import increase and export decrease. Thus, balance of payment becomes negative. In the long run, it creates scarcity in the foreign exchange.

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