Impact or Effect of Inflation ➨ Inflation affects the patte | UPSC Notes EPFO Labour Law

Impact or Effect of Inflation

➨ Inflation affects the pattern of production, a shift in production pattern takes place from consumer goods to luxury goods.

➨ On Investment: Inflation discourages entrepreneurs in investing as the risk involved in the future production would be very high with less hope for returns.Uncertainty about the future purchasing power of money discourages investment and savings.

➨ Inflation also results in black marketing. Sellers may stock up the goods to be sold in the future, anticipating further price rise.

➨ The effect of inflation is felt on distribution of income and wealth and on production.

➨ People with fixed income group are the worst sufferers of inflation.Those living off a fixed-income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living.

➨ The entire economy must absorb repricing costs (“menu costs”) as price lists, labels, menus and more have to be updated.

➨ If the inflation rate is greater than that of other countries, domestic products become less competitive.

➨ They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term.

➨ On Exchange rate and trade: There can also be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation.

➨ On Taxes: Higher income tax rates on taxpayers. Government incurrs high fiscal deficit due to decreased value of tax collections.

➨ On Export and balance of trade: Inflation rate in the economy is higher than rates in other countries; this will increase imports and reduce exports, leading to a deficit in the balance of trade.