[PDF Notes] The effects of inflation on different groups of society are as follows

Inflation results in redistribution of income and wealth because the prices of all the factors of production do not increase in the same proportion.

Generally, the flexible income groups, such as businessmen, traders, merchants, speculators gain during inflation due to wind-fall profits that arise because prices rise faster than the cost of production.

On the other hand, the fixed income groups, such as, workers, salaried persons, teachers, pensioners, interest and rent earners, are always the losers during inflation because their incomes do not increase as fast as the prices.

Inflation is unjust because it puts economic burden on those sections of the society who are least able to bear it. The effects of inflation on different groups of society are as follows:

1. Debtors and Creditors:

During inflation, the debtors are the gainers and the creditors are the losers. The debtors stand to gain because they had borrowed when the chasing power of money was highland now return the loans when the purchasing power of money is low due to inflation.

The creditors, on the other hand, stand to lose because they get back less in terms of goods and services than what they had lent.

2. Wage and Salary Earners:

Wage and salary earners usually suffer during inflation because (a) wages and salaries do not rise in the same proportion in which the prices or the cost of living rises and (b) there is a lag between a rise in the price level and a rise in wage and salary.

Among workers, those who have formed trade unions, stand to lose less than those who are unorganized.

3. Fixed Income Groups:

The fixed-income groups are the worst sufferers during inflation. Persons who live on past saving, pensioners, interest and rent earners suffer during periods of rising prices because their incomes remain fixed.

4. Business Community:

The business community, i.e., the producers, traders, entrepreneurs, speculators, etc., stand to gain during inflation, (a) They earn wind-fall profits because prices rise at a faster rate than the cost of production (b) They gain because the prices of their inventories go up, thus increasing their profits, (c) They also gain because they are normally borrowers of money for business purposes.

5. Investors:

The effect of inflation on investors depends on in which asset the money is invested. If the investors invest their money in equities, they are gainers because of the rise in profit. If the investors invest their money in debentures and fixed income bearing securities bonds, etc, they are the loser because income remains fixed,

6. Farmers:

Farmers generally gain during inflation because the prices of the farm products increase faster than the cost of production, thus leading to higher profits during inflation.

Thus inflation redistributes income and wealth in such a way as to harm the interests of the consumers, creditors, small investors, labourers, middle class and fixed income groups and to favour the businessmen, traders, debtors, farmers etc.

Inflation, is society unjust because it makes the rich richer and the poor poorer; it transfers wealth from those who have less of it to those who have already too much of it.

Leave a Reply

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