How Does Inflation Affect The Economy

How does inflation affect an economy?

Vaganov Aleksandr Grade 10 - 6th November 2015

1.Inflation is a continuous or sustained increase in the general level of prices of “basket” goods and services in an economy over a period of time. It is not just when the prices go up for a day, then return to the normal. When the price level rises, each unit of currency buys fewer goods and use less services. Therefore, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. (https://en.wikipedia.org/wiki/Inflation ) Also, we can observe about hyperinflation in the economy. It is when the prices rise so fast that the money becomes almost worthless.

So, the prices for imported goods are increased and became expensive. Therefore, to compensate the prices for imported products and shortage of population’s money, the government began to print more money, which led for increase of money supply and by -turn for raise of imported inflation in the country. Imported inflation is rising of import prices. Furthermore, by -turn the increase of money in population and increase of inflation rate may cause wage price spiral. In the economy, a wage-price spiral represents a circle process in which wage increases cause price increases which in turn cause wage increases. It can start because of high aggregate demand combined with full employment or due to an oil price

Many governments try to have a low but positive rate of inflation. They believe that high inflation can have damaging economic and social consequences, such as income redistribution, negative real interest rates, falling real income. But inflation can also affect different groups of society.

Generally, the flexible income groups of society, such as businessmen, merchants, traders gain money during inflation because of wind-fall profits which emerge since prices rise faster that the cost of production. However, the fixed and low-income groups, such as workers, pensioners, teachers suffer from high inflation because their profits do not increase as fast as the prices of goods and services. (http://www.preservearticles.com/2011092213869/the-effects-of-inflation-on-different-groups-of-society-are-as-follows.html)

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