Inflation is an increase in the general price of goods and services in an economy over time. This article will help you to get a better understanding of the concepts behind inflation, and its impact.
What Is Inflation?
Inflation is the overall price growth of goods and services. It can occur due to economic growth and overheating of the economy.
When the economy grows, businesses and consumers gain extra spending power, leading to high demand and less supply. This situation leads to moderate inflation, and if inflation happens at a high rate, it can happen due to overheating of the economy.
Inflation can also happen due to other reasons like losing currency, weather effects, and more. You have gained enough knowledge about inflation. Now, let us see what the effects of inflation are.
3 Effects of Inflation
Inflation is a term that is misunderstood by a lot of people. The idea of inflation can make people anxious as they are afraid to lose money. You have learned the basics about inflation in the previous section. The following are three effects of inflation-
Lose Purchasing Power
The first and foremost effect of inflation is that consumers will lose their purchasing power as consumers can afford less consumption at fixed amounts. Whether inflation happens at a low or a high rate, customers will lose purchasing power. They will lose twice as fast as the high inflation rate.
Money Will Lose Its Value
The second effect of inflation will be on money means if the price of the products and services goes up, the money will lose its value. For instance, you saved 50 dollars for 10 years. You decided to purchase some stuff and after 10 years from that money as the price of some stuff was 50 dollars at that time. Now you decided to spend those 50 dollars to purchase some stuff, but the price would have gone way too high.
If you look at the value of 1000 dollars in 1980 and 1000 dollars in 2019. The value of 1000 dollars in 1980 will become 500 in 2019. It means you could buy more products and services in 1980 than in 2019.
Reduce the Cost of Repayment
Inflation not only hurts society but also has positive effects. Inflation reduces the cost of repayment. As you read in the previous point, inflation reduces money’s value. Similarly, it also reduces the interest rate of the loan.
For instance, a person who borrows a loan of 200,000 at the interest rate of 5 percent for 25 years in 1995 has to repay 345,000 dollars for that loan, which will include 145 dollar interest rate alone. After 25 years, the cost of 345,000 dollars will become 205,000 dollars due to inflation and loss of money value.
Lastly, inflation is a part of human life. It has many negative and positive effects that cannot be covered in the article. Moderate inflation does not harm society and poor people, but high inflation will lead to inequality as wealthy people will have higher purchasing power and poor people will suffer.