Inflation happens when the price level of goods increases at a sustained rate. High rate of inflation is seen to be damaging for the entire economy. It brings uncertainty and take away the worth of savings. Low inflation rate can pose various advantages to the entire economy. Inflation is not essentially harmful for an economy, a creeping inflation has seen to generate positive impact on the entire economy. Let us look more about the advantages and disadvantages of inflation in detail.
Advantages of inflation
Inflation mainly benefits the manufacturer of products. By selling their products at a higher price, they can easily make good profits.
Better Returns on Investment
At the time of inflation, both entrepreneurs and investors get added incentives to invest in productive tasks. In this way, they receive enhanced returns.
As the producers start to get the right investment, they will make more services and goods. Thus, inflation results in an increase in manufacture of services and products.
Higher chances of employment and improved income
As inflation leads to an increase in the production, people see an increase in the demand for several factors related to production. This includes manpower too. Due to this reason, job opportunities and earrings increase at the time of inflation.
Shareholders gets to earn a good amount of income
When the firm makes larger profits during inflation, then it can announce its dividends to shareholders. This will help shareholders to see an increase in the dividend income at the time of inflationary periods.
At the time of inflation, the buying power of money tends to reduce. This implies that if the borrower pays an interest rate lesser than the rate of inflation, then he makes profit in the entire process. This is due to the reason that the real worth of the money returned by the borrower is a lot lesser than the value at which he borrowed.
Moderate inflation aids in adjustment of wages
Moderate inflation rate makes it simpler to adjust to relative wages. If your average wage is increasing because of moderate inflation, then it is lot easier to enhance the salary of productive employees. Unproductive workers can see a drastic salary cut. Zero inflation can lead to more cases of unemployment, and wage cut with firms.
Inflation can help in economic development
During low inflation, it is possible for the economy to get stuck in recession period. Targeting a high inflation rate enables an increase in the economic development of a nation.
Drawbacks of inflation
Inflation discourage long-term economic development and investment
The period of confusion and uncertainty is likely to happen at the times of high inflation. Low inflation encourages greater stability within firms. It also encourages companies to take invest and risks.
Inflation makes the economy uncompetitive
A relatively high inflation rate can make exports uncompetitive. This can lead to account deficit and poor economic development. This is very important for nations that falls in the Euro-zone as they are unable to devalue to reestablish competitiveness.
Reduce the worth of savings
One of the major disadvantages of Inflation is that it results in the downfall of the worth of money. It negatively impacts the savings of people. If the rate of inflation is greater than the rate of interest, then it can cause income redistribution in the society. Due to high inflation, the interest rate reduces, that brings loss to the pensioners.
Reduction in real wages
In a few situations it has also been seen that high rate of inflation results in a reduction in real earnings of employees. If the rate of inflation is more as compared to the nominal wage, then it will bring down the real income. This problem has already been seen during the period of recession the year 2008-16, when the prices increased at a faster rate than income.
A fall in income by fixed income groups
The real income of any individual is the buying potential of his income. For people who falls under the category of the fixed-earning group or pensioners, or salaried individuals etc. imply that are going to experience a reduction in the income. This states that their buying power will diminish.
Results in non-uniform income distribution
At the time of inflation, entrepreneurs as well as businessmen experience a surge in profits. People who belong to the salaried groups see a major declination in their actual income. That is the reason for the inequality in distribution of income to become severe at this period.
Disturbs the Government’s Planning Process
Inflation causes the value of raw materials, factor services and goods to increase. This requires the Government to make more investment in completing investment projects that are undertaken at the time of the planning duration. Failing to raise financial resources via taxation or savings, disturbs the entire planning procedure.