What is Inflation? | Causes | Effect/ Impact of Inflation

Inflation

Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of the currency is falling. Central banks attempts to limit inflation, and avoid deflation, in order to keep the economy running smoothly.

Causes of inflation -

Both types of inflation cause an increase in the overall price level within an economy. Demand-pull inflation occurs when aggregate demand for goods and services in an economy rises more rapidly than economy’s productive capacity. Raising the energy prices cost the cost of producing and transporting goods To rise. A rise in the rates of VAT would also be a cause of increased domestic inflation In the short term because it increases a firms production costs.

Inflation can also come from external sources, for example A sustained rise in the price of crude oil or other imported commodities, foodstuff and beverages

Effects of inflation

1. Debtors and creditors

During the periods of rising prices, Debtors gain and creditor lose. When prices rise, the value of the money falls. Though debtors return the same amount of money, but they pay less in terms of goods and services. This is because the value of money is less than when they borrow the money. Does the button of the debt Is reduced and debtor’s gain.

2. Salaried persons

Salaried workers such as clerk, teachers, and other white collar persons lose when there is inflation. The reason is that their salaries are slow to adjust when prices are rising.

3. Wage earners

Wage earners may gain or lose depending upon the speed with which their wages adjust to rising prices. If there unions are strong, they may get their wages linked to the cost of living index. In this way, they may be able to protect themselves from the bad effect of inflation. But the problem is that there is often a time lag between Rising of wages by employees and the rise in prices. So workers lose because by the time wages are raised, the cost of living index may have increased further.

4. Fixed income group

the recipients of transfer payments such as pensions, unemployment insurance, Social Security, etc. And recipients of interest and rent leave on fixed income: pensioners get fixed pension. Similarly the renter class consisting of interest adrent receivers gets fixed payments. The same in the case with the holders of fixed interest bearing securities, debentures and deposits.

5. Equity holders and investors

Persons who hold shares for stocks of companies gain during inflation. For when prices are rising, business activities expand beach increase profits of companies. As profit increase, dividends on equities also increase at a faster rate than prices.