Inflation refers to the raise in the prices of goods and services. It means that the purchasing power of money is decreased. When the demand for a particular product increases the producer sells the good at an increased price, thus resulting in the lower purchasing power of money. Decreased purchasing power of money can be explained in this example. If a samosa is sold at Rs. 2 then you get 5 samosas at Rs. 10 and if the demand for a samosa at a particular shop increases the shopkeeper increases the price of the samosa for Rs. 5 and then you get 2 samosas in Rs. 10. This means that money buys less product in the latter case. The increased demand level can be thought to get a price hike and the supply of the product must also be increased in order to control inflation.
Types of inflation: inflation is inversely proportional to the purchasing power of money. When inflation rises the purchasing power of money decreases and the lowering of inflation will increase the purchasing power of money.
- Demand pull inflation: When the demand for the goods and services are pulled high, then the purchasing power of money can be said to decrease. This means that increase in demand for commodities will boost up the economy and more money is introduced in the market.
- Cost push inflation: When the cost of the commodity is pushed to a higher level, then the purchasing power of money decreases giving rise to inflation. This means increasing the cost of the commodity will fetch more money in the market.
- Currency inflation: When the currency increases, people buy more and then more money is spent on goods and services which again gives rise to demand of the product and less supply tends to give birth to inflation.
Effects of inflation on society:
- The person who has borrowed money from some other person an year ago is said to be profited from inflation as the value of money is decreased from the time money is borrowed till the time money Is paid back. On the other hand, the creditor who has given money is said to be in loss due to inflation.
- The salaried person who has not been able to cover up his expenses in the money that the company is providing to him for his living does not seem to be benefitted from inflation as the salary remains constant and the prices of goods and services increases.
- The person who is earning wage can be benefitted or can suffer from a loss from inflation because the daily wages are decided on regular intervals of time based upon inflation. Price for a certain commodity will be less and other commodity cost can be more, so it has dual effect on the wage earner.
- Investors gain profit because of inflation as the money that they invested when the money power was more, now has less power and the property that they have invested into will now be sold at a higher price.
- Businessman will gain more advantage from inflation because the prices of goods and services which has arisen due to inflation are now sold at much higher rates and the stock of the product bought by the businessman was older and a lower price was incurred when making the stock.
- People who are in to agriculture gain profit from inflation as the prices of raw materials increases and the farmer sells the raw materials at the increased price and the money that is involved in farming remains constant as the farmer is the sole producer of a crop.
- Government also gains profit from inflation as the taxes that they receive from various earning groups will become higher because of inflation. The more money being spent, the more is the tax that is incurred by the government on the product which are being purchased.
Effects of inflation on production:
- Increase in inflation results in the change in transaction as the businessman will not buy the product for selling in a large amount and will keep small stock due to which the fall in price of the products will help them to buy more commodities at the time when there is no inflation.
- When inflation increases there will be reduction in production of goods and services because the demand will be less.
- If inflation rises, then the producer might want to make a fall in quality and quantity of the commodity because the raw materials which are used to make the goods are purchased at a higher amount and the people will demand less in case of inflation.
- Inflation can lead to hoarding and black marketing also. Businessman do not get the whole stock in the market and when the demand becomes more and the price of the commodity increases, they pull out the left-over stock at the higher price resulting in the negative effect of inflation. It has a negative effect on the common people but the businessmen are profited from hoarding and black marketing.
- Money which is saved by people will be less in case of inflation as the prices of the goods and services are at a higher level and expenditure becomes more.
- Inflation is beneficial for the jobseekers because the increased demand of various goods and services gives rise to increase in supply and in order to meet the demand the companies will have to employ more jobseekers so that the production is met.
Conclusion: Increase in the level of inflation can be disastrous for all. If demand and supply are met at regular intervals of time, then inflation can be said to be profitable both for the society and government whereas the instant increase of inflation and not meeting up with demand and supply will make inflation harmful for everyone and may give rise to devaluation of money and thus devaluing the economy of India.
You may also leave your comments in the response section about what you think on inflation, will it be a profit or loss for majority of the people?