Short notes on Effects of Inflation

On February 26, 2021, the Report on Currency and Finance report was released by the Reserve Bank of India (RBI) for 2020-21. The report was released with a theme called “Reviewing the Monetary Policy Framework.” The report gives a detailed insight into the country’s flexible inflation targeting or FIT framework. According to the report, there is a significant rise of 6.30% in the annual retail inflation rate every year in May, followed by 4.29% in April. The price inflation has risen to 12.94%, the maximum in the last two decades. 

Inflation is a crucial topic that majorly deals with the increase in the prices of an economy throughout a specified time. Every time the costs in an economy increase, every currency unit buys comparatively lesser goods and services. Also, hyperinflation directly affects the purchasing power of consumers. Today, in this article, we will discuss inflation, what it is, and its effects. So, without any further ado, let’s get started! 

Demand-pull inflation 

When the aggregate demand in the economy increases, it leads to demand-pull inflation. There are several causes of this type of inflation. These include – 

• Increase in the money supply in the economy 
• Rise in the Forex reserves 
• Due to fiscal stimulus
• Government spending
• Depreciation of rupee
• Increased borrowing
• Low unemployment rate

Effects of Demand-pull inflation 

The following are the effects of Demand-pull inflation in the economy – 

• Rise in prices of goods and services is also referred to as inflation.
• Shortage in supply
• Rise in the cost of living.

Cost-push inflation 

There are several reasons which lead to cost-push inflation in an economy. These include – 

• Speculation and hoarding of commodities
• Fluctuation in the prices of crude oil 
• Low growth in the Agricultural sector
• Defects in the food supply chain
• Rise in the Interest rates by RBI
• Increase in the prices of inputs
• Defects in the Supply chain
• Currency depreciation 
• The rise in indirect taxes
• Food Inflation

Built-in inflation 

In this type of inflation, the workers aroused a high wage demand. Such demands are fulfilled by raising the prices of the end product. 

All these types of inflation directly or indirectly leave some or other effects on the economy. Here are the effects of inflation on the economy. 

Effects of Inflation on the economy

Here are some of the most prominent effects of inflation on the economy – 

Effects on production 

The rise in prices of goods and services stimulates its production. As producers are happy to get high profits, they utilize all resources to produce more. However, after reaching the stage of total employment, production stops at a certain point as all resources are fully used. This gives rise to the cornering and hoarding of commodities. Although, these effects are not always seen. Whereas, even after increasing prices, production comes to a still position. This condition is referred to as stagflation. 

Effects on employment and income 

Another significant impact of inflation is seen on income and employment. As production and spending increase, the national income also increases. Also, it gives rise to employment opportunities as there is a higher need for workers. However, the income of the people falls because of the massive fall in the purchasing power of the money. 

Effects on business and trade 

Because of factors like high income, enormous spending, and more outstanding production, the internal trade increases in the condition of inflation; however, some firms expand their business to attain higher profits. During inflation, the prices and the wages of the workers stop at a point, rising inequality in the economy. 

Effects of government finance 

During hyperinflation, the government revenue increases as they get revenue in different forms. These include tax, sales tax, excise duties, and so on. However, the government is expected to spend more; as a result, public expenditure boosts. But the rise in prices reduces the burden of public debt. 

Effects on growth 

On the one hand, where mild inflation contributes to economic growth, hyperinflation can negatively affect the development of an economy. In developing countries like India, benign inflation is the ideal condition. 

Conclusion 

With this, we end the topic—short notes on the Effects of Inflation. Inflation is a crucial topic that majorly deals with the increase in the prices of an economy throughout a specified time. Every time the prices in an economy increase, every currency unit buys comparatively lesser goods and services. 

There are majorly three types of inflation which show different effects on various sectors of life. Its effects are primarily seen in the Distribution of Income and Wealth, Production, Income and Employment, Business and Trade, Government Finance, and, lastly, the economy’s overall growth. It is believed that in developing countries like India, mild inflation is the ideal condition.