Question

Think about your current situation and what happens when prices increase generally. There are several methods that can be used to measure changes in prices but one of the most commonly used method is the CPI.

3. How does inflation affect society and who are the losers and gainers from inflation?

4. Define demand pull inflation and cost push inflation.

Answer 1

Inflation refers to the rate at which the overall prices of goods and services rises resulting in the decrease in the purchasing power of the common man, which can be measured through Consumer Price Index.

3. 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, 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:

a. 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.

b. 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.

c 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.

d. 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,

4. Inflation is mainly caused either by demand side or supply side or both the factors. Demand side factors result in demand-pull inflation while supply side factors lead to cost-push inflation.

a. Demand Pull inflation- When the aggregate demand increases at a faster rate than aggregate supply, it is known as demand-pull inflation. It is caused by Monetary and real factors.

b. Cost- Push inflation- When there is an increase in the price of inputs, resulting in decrease in the supply of outputs, is is known as cost-push inflation. It is caused by Monopolistic groups of the society.