Effects of Inflation on the Economy

What is Inflation?

Inflation is the rate of increase in prices over a given period of time. It represents how much more expensive a set of goods or services has become over a period of time (most commonly a year). Inflation is typically a broad measure. For example, the overall increase in the prices or the increase in the cost of living in the country.

What are the effects of Inflation?

There are multi-dimensional effects of inflation on an economy. This can be seen both at the macro and the micro levels. It redistributes income, destabilises employment, tax, saving and investment policies and it may result in recession.

What are the types of Inflation?

Inflation can be broadly divided into three categories depending on its range of increase- Low inflation (which is slow and predictable), Galloping inflation (which is very high inflation running into double digit numbers) and Hyperinflation (which is a large and accelerating form of inflation in a very short span of time).

What causes Inflation?

The most common causes of inflation are an imbalance in supply and demand. Inflation tends to increase when consumer demand for goods and services increase but the supply side is unable to meet this demand. This is known as demand pull inflation.

What overall effect does Inflation have on the economy?

A particular level of inflation is healthy for an economy. This specific level is called the range of inflation. Inflation beyond the limits of this range is unhealthy for an economy. This can lead to contraction of the economy which will finally result in recession.

Effects of Inflation on the Economy: Inflation is the sustained rise in prices of goods and services over time. This leads to the erosion of purchasing power. Purchasing power is the value of a currency expressed in terms of the number of goods and services that can be bought by one unit of the currency.

During periods of rising prices, uneven inflation acts like a hidden tax, hitting certain groups disproportionately. This loss of buying power, particularly for those already struggling, is the most concerning consequence of inflation.

In this article, we will read about Inflation and mainly the effects of inflation on the economy. We will also discuss the types and causes of inflation.