Inflation - Really a Curse?

Inflation has long been the common man's concern about the economy. Rising inflation directly affects the price of the consumer goods and services thereby affecting the budget of a common man in one way or the other. Though inflation is the most immediate economic parameter to be associated with the hike of price, it has its long and far-reaching effects on the society and social concerns. Globally the poorer and developing nations like India are more vulnerable to the effects of global inflation. The growth of the prices with time and the decreasing value of money with time is the effect of inflation. When I was a kid my mother always told me that when she was a kid they use to buy grocery for whole week in just 50 rupees which is now not even possible at 500rupee, and also says that by the time you will have kids, you won’t be able to get grocery for 1 week in 5000rupees. At that time I didn’t know about inflation and thought mom is joking around with me. But now I am quite sure that with the rising inflation, maybe after 10 years when I have kids, 5000 won’t be a healthy budget for 1 week’s food item.

In this crisis-ridden world, economies around the world are experiencing high bouts of inflation and India is no exception to that. Even India is also facing a growing inflation rate. In economics, inflation is defined as a rise in the general level of prices of goods and services in an economy over a period of time. Inflation is a rise in the general level prices of goods and services which make each unit of currency buys fewer goods and services. Consequently, inflation also reflects erosion in the purchasing power of money a loss of real value. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money leading to a loss of real value in the medium of exchange and unit of account within the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index normally the consumer price index over time.

Inflation in a growing economy as well as in general economy is really common with time. Inflation's effects on an economy are various and can be simultaneously positive and negative. A rising inflation does not always mean a negative effect on the economy; at times price rise can also be good for growth, provided the price rise is consistent, on the other hand, a rapid price rise is obviously a negative effect. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. It is not just that inflation is negative; there are few positive effects also which include ensuring that central banks can adjust real interest rates to mitigate recessions, and encouraging investment in non-monetary capital projects.

Effects of Inflation

By popular definition inflation is an increase in the general price level, which results in an excessive or persistent increase, causing a decline in purchasing power. Hence the direct effect of inflation is the price rise. An increase in the general level of prices implies a decrease in the purchasing power of the currency thereby leading to a fall in the value of money. That is, when the general level of prices rises, each monetary unit buys fewer goods and services. In simple words, price rise leading to a fall in the value of the currency. The effect of inflation is not distributed evenly in the economy, and as a consequence, there are hidden costs to some and benefits to others from this decrease in the purchasing power of money. The effect of inflation is such that, those segments in society which own physical assets, such as property, stock etc., benefit from the price/value of their holdings going up, while those who seek to acquire them will need to pay more for them. An increase in inflation is a good measure as long as there are increases in wages also.

Inflation is not just a measure of price rice but also helps boost an economy. Inflation is one way to reduce debt burdens. As wages and prices rise, the value of existing debt erodes. Consumers, businesses and governments are liberated to spend more freely. To be sure, higher inflation represents a wealth transfer to debtors who repay in cheaper amounts from creditors who receive cheaper currency. This is all economics that at times is really difficult for the common man to understand. Faster inflation might boost the economy in other ways, too. If people think prices of cars, appliances or homes will be higher next month or next year, they may buy now instead of waiting. Higher inflation may also allow the Reserve Bank to lower effective interest rates. If interest rates stay below inflation though that's hardly assured the resulting cheaper credit should spur borrowing.  

Effect of Inflation on India

Like every other economy, the role of inflation on Indian economy is also evident. Like every other economy, our Indian economy is also affected by inflation and change in prices of the commodity in our country as well as countries with which we have trade relations. Though inflation has always been a major public concern and always been subject to heated political debate in our country, it is an astonishing truth that since 1950 India has experienced one of the lowest inflation rates in the world in comparison to other developing countries and most of these years it had consistently maintained a steady control over the inflation rate by limiting it to only a single digit figure. And the figures are quite impressive.

Inflation in India as in other countries also plays a major role in determining the economic scenario of the country and also helps to take necessary measures whenever required. Though, with proper and efficient fiscal management India has been able to mostly avoid the disastrous global effects of inflation.  Various sectors of Indian economy suffered from the onslaught of inflation in various periods. Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Since the beginning of the recent financial crisis in 2008, the Indian government through RBI is printing and injecting a gargantuan amount of money in the economy to get out of recession. This is the reason for the double-digit inflation in India.

Negative Effects of Inflation

It has been believed that inflation has both positive as well as negative effects on an economy and the measures taken are generally for the welfare only but at times common man is not aware of these. But there are few who find out some loopholes in the policies and start making a profit from these activities thereby deceiving the common man. High or unpredictable inflation rates are regarded as harmful to an overall economy as these tend to add inefficiencies in the market and make it difficult for the companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation. Uncertainty about the future purchasing power of money discourages investment and saving. And inflation can impose hidden tax increases, as inflated earnings push taxpayers into higher income tax rates unless the tax brackets are indexed to inflation. There needs to be a growth in inflation but only when wages are also increasing. In case of growth in inflation without any increase in wages of the people, the situation can be quite tough for those working on nominal income, daily wagers as well as pensioners. Since inflation causes redistribution of prices, hence if there is no increase in wages as well it would become really difficult for the common man. Inflation also leads to:

• Price Rise: One of the major effects of the inflation is the price rise. High inflation can prompt employees to demand rapid wage increases, to keep up with consumer prices. In the cost-push theory of inflation, rising wages, in turn, can help fuel inflation. In the case of collective bargaining, wage growth will be set as a function of inflationary expectations, which will be higher when inflation is high. This can cause a wage spiral. In a sense, inflation begets further inflationary expectations, which beget further inflation.
• Social Unrest and Revolts: Inflation is directly linked to an increase in the price of commodity and food items as well. People can compromise on the luxury items. If there is an increase in the rates of the food items without an increase in the wages of the people, this can lead to a great disparity and difficult for people to afford basic necessities of the life which would automatically lead to unrest in the region or country as a whole. We have already witnessed the ouster of many leaders around the world owing to protest by the public on the issue of inflation and price rise.
• Hoarding: Hoarding is yet another curse that is associated with the problem of hoarding. It has often been observed that people buy durable and non-perishable commodities and other goods as stores of wealth, to avoid the losses expected from the declining purchasing power of money, creating shortages of the hoarded goods. Also a lot of people buy products and store them well in advance whenever a price rise is expected thus leading to a shortage of consumer goods and even if there is no price rise, these people are not willing to sell these products at the same or lower price and often this leads to rotting of food items that are stored in the cool storages and also lead to destruction of their nutrient content.
• Loss of Allocative Efficiency: A change in the supply or demand for a goodwill normally cause its relative price to change, signalling to buyers and sellers that they should re-allocate resources in response to the new market conditions. But when prices are constantly changing due to inflation, price changes due to genuine relative price signals are difficult to distinguish from price changes due to general inflation, so agents are slow to respond to them. The result is a loss of allocative efficiency.

Conclusion
Government exists to do two things: to increase what is socially desirable, and decrease what is socially undesirable. Inflation is something to a great control in the hands of the government. The problem is, the government can't know what is and isn't desirable, because that is a question of individual values. So all government can do is legislate and subsidize. It is the responsibility of not just RBI and the government but it is the responsibility of everyone concerned. Increased legislation and regulation adds to the cost of production. And subsidies lead to monetary inflation and market distortions. Both legislation and subsidization lead to higher prices. When prices stay high, consumers are hurt. When businesses lower prices by cutting costs, higher unemployment and lower wages are the results. Let’s give a little bit contribution towards our inflating Indian economy by decreasing our demand for a short span so that we all can have a secured future.