Impact of Inflation

Inflation:
Inflation means the rise in the prices of goods. It occurs due to the reduction of purchasing
power of an individual. Inflation occurs when currency value decreases. If there is a huge
amount of currency circulating in the market then the prices of the goods increase because
money won’t have that much power. To reduce inflation, deflation should occur all these things
are controlled by RBI, if the money flow is huge in the market they increase the interest rates
then people won’t take loans from the market for some time. Inflation can be measured in
different ways depending on the product. Inflation occurs when a nation’s money supply
growth outpaces economic growth.

Types:
 Demand-Pull Inflation:
When there is a shortage of the products then the cost of the product increases as there
is demand for the product increases companies try to increase their cost. For example,
on vocational days the price of the tickets will be high than on normal days. But also
we travel on those days because of the demand.

 Cost-Push Inflation:
If the raw materials of the goods increase then the prices of the products will be
increased by companies. If the product has demand or not it doesn’t matter only the
matter is an increase in the price of raw materials. Sometimes it is risky for the
organization if the products are unsold the company won’t get any profit.

 Built-In Inflation:
When demand-pull inflation and cost-push inflation occur, employees start to demand
to increase their wages. If employers don’t keep their wages competitive, they could
end up with a labor shortage. If a business raises workers’ wages or salaries and tries
to maintain profit margins by raising prices, that’s built-in inflation.
Factors influencing inflation:
 Food Prices
 Fuel Prices
 Commodities
 Growing income level
 Government policies
 Developed Lifestyle

Measurement of inflation:
 Wholesale price index
 Consumer price index

IMPACT ON ECONOMY
Inflation is always not bad for the economy however creeping inflation is good for the
economy. In this study, we discuss the favorable and unfavorable impacts of inflation on the
economy.

Rate of inflation Impact

0-3 % Low Recession in the economy
3-5 % moderate Growth in Economy
Above 5% High Threat to economy

Favorable Impact
Inflation impacts the economy in the favorable following ways.

 Higher Profits since producers can sell at higher prices

 Better Investment Returns since investors and entrepreneurs receive incentives for
investing in productive activities.

 Increase in Production.

 More Employment and Better Income.

 Shareholders can earn a good income since companies book more profits and tend to share
it with their shareholders via dividends.

 Benefits to Borrowers – The real value of the money returned is less than that of the money
borrowed.
UnFavorable Impact
Inflation impacts the economy in the favorable following ways.

 Fixed-Income Groups experience a fall in income including salaried employees,

pensioners, etc.

 Inequality in Income Distribution Increases

 Upsets the Planning Process

 Speculative Investment Increases

 Harmful Effects on Capital Accumulation

 Lenders face Losses

 Negative Impact on Export Income

The inflation rate in India accelerated for the first time in four months to 7% in August of 2022
from 6.71% in July, above market expectations of 6.9%

Conclusion:
Continuous inflation makes the situation unstable. It makes the business uncertain and unstable.
People get disturbed as they get unsatisfied with their salaries and their demand for wages and
salaries increases. Middle-class people suffer more as their real value of money is low. But the
most serious effect of inflation from the standpoint of the economy is that it makes the
economic environment of business unstable.
 IMPACT ON THE FINANCIAL SERVICE INDUSTRY
In any economy, the financial sector plays a major role in economic growth and therefore in
sustainable economic development. Therefore, interest in this sector and improving its
performance is viewed as a strategic objective for any country. The financial sector is the major
source of financing for productive economic projects in every economy in the world.
Developing and enhancing the financial sector also stimulates the growth of small and medium-
sized enterprises (SMEs) by providing them with access.

India has been witnessing a rise in the inflation rate. Once inflation exceeds the critical level,
increment increases in the long-run rate of inflation. And it has more impact on inflation.

Effects of inflation:
 Inflation may have a lasting impact
 Inflation affecting insurance rates
 Supply and demand remain unbalanced
 Rising Energy Costs Exacerbate Inflation
 Investors Should Adjust Their Expectations

Increasing inflation also increases the cost of maintaining liquid cash balances which leads
individuals and projects to transfer money into real commodities, which results in a decrease
in the ratio of the money supply to GDP, which is an important determinant of banking sector
performance. On the other hand, higher inflation leads to an increase in information and
transaction costs, which impedes the achievement of the economic development process. For
example, the instability of the inflation rate makes it difficult to predict costs and profits and
the high cost of such forecasting, which leads to the inability of individuals and projects to
develop future plans.

Conclusion:
There are some policy implications arising from our research. The first implication is that
governments and central banks should continue fighting against inflation with an adequate
monetary policy in order to maintain macroeconomic stability. Another implication is that
authorities should pay attention to the non-linear effects of inflation on financial sector
development and thus on economic growth.
References:
https://www.tandfonline.com/doi/full/10.1080/23322039.2021.1970869#:~:text=Increasing%
20inflation%20also%20increases%20the,determinant%20of%20banking%20sector%20perfo
rmance.

https://bfsi.economictimes.indiatimes.com/news/industry/how-does-inflation-impact-the-
financial-sector/91031836
https://www.economicsdiscussion.net/inflation/top-6-effects-of-inflation-economy/26075