- On creditors and debtors
- Redistributes wealth from creditors to debtors
- Lenders suffer and borrowers benefit
- Opposite happens when inflation falls(deflation)
- On lending
- Institutions feel the pressure of higher lending as real interest rate is less than nominal rate.
- On aggregate demand
- Indicates comparatively lower supply and aggregate demand rises
- Higher purchasing power
- Suggests producers to increase production level
- On investment
- It is boosted in the shorter run
- Suggests to expand production and hence investment
- Higher inflation, lower the cost of loan
- On income
- For individuals and firms, nominal value of income increases, while real income remains the same
- In shorter run, the value erodes. In longer run the incomes go up due to inflationary situation and increased earning.
- On saving
- Holding money is not an intelligent option.
- People put maximum in banks in savings accounts as savings rates increase. But this happens in short run. In longer run it depletes the value.
- On expenditure
- Consumption falls as prices of goods and services increase
- Investment expenditure increases as borrowers get finances at ‘low cost’
- On tax
- Increased prices of goods and services means people need to pay more indirect taxes- ad valorem(on value)
- Direct taxes also increase as people move in to higher tax slabs( but real value is not increasing)- known as bracket creep
- Hence in the US and european countries tax provisions are indexed to inflation
- For the govt, tax revenue goes up but real value does not compare with the current pace of inflation as there is a lag in tax collection.
- However govt benefits on interest burden front as it is a huge borrower.
- On exchange rate
- Loses value against a foreign currency- depreciation
- It is a comparative matter, as the foreign currency might be facing inflationary pressure.
- On exports
- Exportable items have competitive prices in world market and volume of exports increase while their value decreases
- Hence export income increases
- Importing partners put pressure for stable exchange rates as imports increase
- On imports
- Gives an advantage of lower imports and import-substitution as they are costlier.
- But in case of compulsory imports economy loses more foreign currency.
- On trade balance
- Exporting countries (developed) stand to gain, while countries with compulsory imports lose(developing)
- On employment
- Philips curve and NAIRU
- On wages
- Negative impact on purchasing power and living standards of wage earners
- DA for organised sector employees
- On the economy as a whole
- All the above segments belong to an economy
- There is a range of inflation which is thought to be healthy for every economy. Developed countries have the range of 1 to 3%, while for India 4-5% is seen as comfort zone.
- Inflation beyond range brings recessions and depressions.
