6. Impact of Inflation

Inflation impacts economy in many ways, some of them have been listed below:

1. Recession in some of the sectors: Because of the increase in prices of certain goods, their demand goes down and results in recession in some of the sectors of the economy.

2. Adversely impacts the wage earners: Inflation adversely impacts the wage earners as their purchasing power goes down but wages remain constant. On the other hand, it helps the businessmen, as their profits tend to go up because of rise in prices.

3. Creates distortions in production patterns: Because of inflation, capital resources get diverted from long term to short term uses and production shifts from essential to non- essential goods in the economy.

4. Impact growth and availability of credit for industry: More often than not, the interest rates are raised to curb the inflation in the economy. This results in credit crunch for the industry thereby impacting the growth of the economy. The recent spell of inflation in India in last few years has witnessed this trend.

5. Impacts exports: Inflation discourages exports because the foreign importers find manufactured goods costlier; and domestic sales are attractive for the manufactures. All

this adversely affects the Balance of Payments. For example, recently Indian economy witnessed one of the highest Current Account Deficit, accompanied by high inflation.

6. Impacts imports: Inflation in domestic economy increases imports as the imported goods may be cheaper than the domestically produced. This has the potential to increase the Current Account Deficit.

7. Adverse effect on Foreign Exchange: With low exports and increased imports due to inflation, the demand of foreign currency increases. This has the effect of depreciation of domestic economy. For example, Indian Rupee saw the largest depreciation in recent times, accompanied by high inflation.

8. Discourage savings: Because of decreasing value of money and uncertainty in the long run, higher inflation depletes the saving rate in an economy.

9. Creates unequal distribution of incomes: Inflation increases the nominal (face) value of the wages while their real value falls. That is why there is a negative impact of inflation on the purchasing power and living standard of the wage employees. Thus making the poor poorer. During inflationary times, the speculators and the black marketers earn income by hoarding the stocks etc. and because of the artificial scarcity, people have to pay more to get the goods and consequently the distribution of income becomes imbalanced and the money goes to traders.

10. Breeds corruption: Inflation mars incentive for hard and honest work, since a common man cannot meet rising expenses with a constant income. It also encourages practices such black marketeering, hoarding etc.

11. Increased Fiscal Deficit: Inflation can also make borrowings by the government costlier thereby raising the fiscal deficit.