Effects of Inflation on Different Groups of Society

It is true that in times of general rise in the price level, if all groups of prices, such as agricultural prices, industrial prices, prices of minerals, wages, rent and profit rise in the same direction and by the same extent, there will be no net effect on any section of people in the community. For example, if the prices of goods and services, which a worker buys rises by 50 per cent and if the wage of the worker also rises by 50 per cent then there is no change in the real income of the worker, ie., his standard of living will remain constant. However, in practice, all prices do not move in same direction and by same percentage. Hence, some classes of people in the community are affected by inflation more favorably than others. This is explained as follows:

  • Producing Classes: All producers, traders and speculators gain during inflation because of the emergence of windfall profits. The prices of goods rise at a far greater rate than costs of production whereas wages, interest rates and insurance premium are all mere or less fixed. Besides, the producers keep such assets, as commodities, real estate, etc., whose prices rise much more than the general level of prices. Thus, the producing and trading classes gain enormously during an inflationary period. However, farmers may gain only if their output is maintained or increased.
  • Fixed Income Groups: Inflation is very severe on those who arc living on past savings, fixed rents, pensions and other fixed income groups called as the middle classes. Those persons who are working in government and private concerns find their money incomes more or less fixed while the prices of the goods and services, which they buy are rising very rapidly. Those with absolutely fixed incomes derived from interest and rent known as the renter class, realize that their money income is absolutely worthless and their past savings have insignificant value in front of high prices. In fact, the worst sufferers in inflation are the middle classes who are considered as the backbone of any stable society.
  • Working Classes: During inflation, the working classes also suffer, firstly because wages do not rise as much as the prices of those commodities and services, which the workers buy. Secondly, there is also time lag between rise in the price level and wages. However, these days, many groups of workers are organized in trade unions and their wages rise simultaneously with rise, in the cost of living. Therefore, it can be presumed that organized workers may not suffer much during inflation. However, there are many groups of workers who are not organized for example, the agricultural laborers, who find no way of pushing up their wages in the face of rising prices and cost of living.

Inflation, thus, brings shifts in the distribution of income between different sections of people. The producing classes such as agriculturists, manufacturers and traders gain at the expense of salaried and working classes. The rich become richer and the poor becomes poorer. Thus, there is a transfer of income from poor to rich classes. Inflation, therefore, is unjust. Besides, those who are hard hit by inflation are the young, old, widows and small savers, i.e., all those who are unable to protect themselves. But the most unfortunate thing is that monetary and fiscal authorities which are entrusted with the task of maintaining price stability are often responsible for creating inflationary conditions, for example, a country at war resorts to printing of currency notes as one of the methods of financing war. Similarly, the government of a developing economy may resort to deficit financing as one of the methods of financing development projects. In these cases, inflationary finance, like taxation, brings in additional revenue to the public authorities. However, taxation cannot destroy an economy except in rare cases by eliminating whole groups of people. Inflation, on the other hand, can destroy fixed income group, pauperise the middle classes and destroy the very foundations of an economy. No wonder inflation has been termed as “a species of taxation, cruelest of all” and “open robbery”. Inflation, particularly the hyperinflation type, will therefore endanger the very foundations of the existing social and economic system. It will create a sense of frustration distrust, injustice and discontent and may force people to revolt against the government. It is, therefore, “economically unsound, politically dangerous and morally indefensible”. Therefore, it should be avoided and even if it occurs it should be controlled.

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: [email protected]

Leave a Reply

Your email address will not be published. Required fields are marked *


*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>