Saturday, April 26, 2014

EFFECTS OF INFLATION

A continuous substantial rise in the general price level is harmful for the community’s socio-economic interest both in term of current welfare and future economic development. The level and the changes in the rate of inflation influence in some way several aspects of our everyday activities.
The inflation has wide ranging effects on various aspects of people’s life.
1. Disposable Personal Income: When the prices of goods and services rise, consumers’ real disposable personal income and as a result their purchasing power are significantly affected. During periods of mild inflation, consumers sometimes react by cutting their spending on luxury and other non-essential goods while during severe inflation substantial anticipatory buying or hoarding becomes a common feature as people move away from financial to real assets.

2. Business Sector: Inflation also affect the business sector. During inflation corporate and non-corporate profits rise sharply and business community react to rising prices by making fresh investments and building up inventories.

3. Government Sector:
Inflation also exercises its influence on the government sector. As prices rise, the revenues yielded by indirect taxes also rise. Under progressive direct tax system revenue from income tax will rise at a faster rate than the growth rate of nominal incomes. As a result a huge transfer of funds from households to the governments takes place.

4. Economy:
Inflation initially activates the economy. A business boom in its early stages causes only a moderate rise in the cost of living of the people while it raises the level of employment in the economy. However, continuous inflation shakes the foundations of the political and economic stability of the system. It creates inequitable and arbitrary redistribution of income and wealth in society. The worst sufferers are the recipients of fixed incomes by way of salaries, pensions and annuities.  Inflation badly affects the holders of government bonds, holders of fixed deposits in banks and the holders of life insurance  policies and money. A continuous inflation can reduce the value of money to almost nothing ruining the holders of money

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