Question

What is inflation? What problems does it pose for an economy and the stability of society?

Answer 1

Inflation

When demand of goods and services exceeds their supplies and it cannot be satisfied even by imports, it leads to rise in prices. The rise of prices of goods and services in economic term is known as inflation. In other words, Inflation is a stage which pushes up the price level and pushes down the value of money.

For example, before independence one Kg. Pure ghee can be bought for Rs. One while in present days price of one Kg. Ghee is Rs. 500. This is the situation of inflation as prices of ghee is increased and value of money is decreased.

Inflation problem for an economy and the stability of society:-

1) Saving Problem- Since hyper inflation results in a serious depreciation of the value of money, it discourages savings on the part of the public. With reduced savings, the process of capital accumulation suffers a serious setback.

2) Problem on Reduction of faith in money- Due to inflation value of money decreases which consequently reduced the faith of public in Money. Consumer start hoarding of essential goods rather than money.

3) Problem of Break down of public moral- During inflation there become a great break down of public morals. It gives stimulus to speculative activity on account of the uncertainty generated by continually rising price level. Producer make serious deterioration in the quality of products and follow other anti social tactics to boost up their profits. Corruption, adulteration and hoarding of goods pollutes the social environment

Effects of Inflation

1)Effects on wages and salary earner = Wages do not rise as much as the rise in prices during the inflation. Wages earners suffer during the inflation. Wages rise lags behind the price rise. Trade union bargain for higher wages for workers whereas the salaried people are not organised hence they suffer much during inflation. The wage rise is not corresponding to rise in the prices.

2) Effects on consumer:- Every individual in the society is consumer. Fixed income group consumers are the worst sufferers during inflation because their purchasing power goes down with the increase in price level in economy.

3)Effects on debtor and creditor- The debtor while repaying the debts return less purchasing power to the creditor than what they had actually borrowed. Since the creditor receive less in real terms, they are the losers during inflation.