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Various Effects of Inflation?


Debtors and creditors:

During periods of rising prices, debtors gain and creditors lose. When prices rise, the value of money falls. Though debtors return the same amount of money, but they pay less in terms of value of money. Thus, various effects of Inflation brings about a redistribution of real wealth in favour of debtors at the cost of creditors.

 Effect of Inflation on Salaried persons:

Salaried workers such as clerks, teachers, and other white collar persons lose purchasing power when there is inflation. The various effect of inflation is that their salaries are slow to adjust to rising prices.

Effect of Inflation on Wage earners:

Various effect of inflation on Wage earners may gain or lose depending on the speed with which their wages adjust to rising prices. If their unions are strong, they may get their wages linked to the cost of living index. In this way, they may be able to protect themselves from the bad effects of inflation.

Effect of Inflation on Fixed-income group:

Various effec of inflation onThe recipients of transfer payments such as pensions, unemployment insurance, social security, etc. and recipients of interest and rent live on fixed incomes. All such persons lose because they receive fixed payments, while the value of money continues to fall with rising prices.


Various effects of Inflation on Persons who hold shares of companies gain during inflation. When prices rise, business activities expand, which increases profits of companies. But those who invest in debentures, securities, bonds, etc., which carry a fixed interest rate, lose during inflation because they receive a fixed sum while the purchasing power is falling.

Business persons:

Various effect of Inflation Business persons of all types, such as producers, traders, and real estate holders, gain during periods of rising prices. When prices rise, the value of their inventories (goods in stock) rise in the same proportion. So they profit more when they sell their stored commodities.


The government as a debtor gains at the expense of households who are its principal creditors. This is because interest rates on government bonds are fixed and are not raised to offset the expected rise in prices. With inflation, even the real value of bonds is reduced.

Thus, inflation redistributes income from wage earners and fixed-income groups to profit recipients, and from creditors to debtors. So far as wealth redistributions are concerned, the very poor are more likely to lose than the middle and high income groups. This is because the poor hold wealth in monetary form and is mostly wage earner. On the other hand, the middle income and rich people are likely to invest in shares and real estate, which witness price rise during times of inflation. Thus, inflation increases the gap between rich and poor.


  • Production: When prices start rising, production is encouraged. Producers earn wind-fall profits in the future. They invest more in anticipation of higher profits in the future.
  • Consumption: When prices start rising, consumption is discouraged.
  • Balance of payments: When prices rise more rapidly in the home country than in foreign countries, domestic products become costlier compared to foreign products.

This tends to increase imports and reduce exports, thereby making the balance of payments unfavourable for the country.

Read more about inflation:


Two types of factors effecting inflation:

  1. Demand-side (or price-pull) factors: The factors that lead to increased demand of goods and services in the economy are demand-side factors. Increased demand for goods and services may be on account of increase in population, increase in the income level of the people, etc.
  2. Supply-side (or cost-push) factors: The factors that lead to increased cost of production, transportation, or sale of goods and services in the economy are supply-side factors. For instance, increase in cost of raw materials, wages, transportation fuel, etc.

Various  effect of Inflation can be managed through change in both supply and demand-side factors. However, changes in supply-side factors can be brought in the long term. The demand-side factors can be changed in a relatively short term.

Role of RBI in Curtailing Inflation

To control inflation, the RBI reduces the money supply in the economy through the exercise of monetary policy. The reduction in money supply reduces the demand of various commodities in the economy.


  • Necessity goods: Necessity goods such as milk, food grains, etc. are consumed by rich as well as poor. Price rise in necessity goods forces poor to reduce the consumption or even stop the consumption of necessity goods. Thus, inflation in necessity goods has a pernicious effect.
  • Luxury goods: Luxury goods such as costly cars, gems and jewellery, etc. are afforded by the rich only. Thus, inflation in these goods is not that pernicious (as in necessity goods) because the rich have the capacity to bear inflation. In fact, some of the luxury items are Giffen goods, which are those goods that people consume more as the price rises and vice versa.
  • Intermediate goods: Intermediate goods are those goods that are used as inputs in the production of other goods. Inflation in intermediate goods leads to price rise in the final goods. For instance, increase in the price of natural gas will lead to increase in the prices of fertilizers.
  • Final goods: Final goods are those goods that are consumed by the final consumer. Inflation in final goods affects the ultimate consumer of these goods only.
  • Fuels
  • Petrol: Inflation in petrol is borne by the owner of automobile and thus does not lead to overall inflation in the economy.
  • Diesel: Inflation in diesel has impact on the overall price level of an economy because diesel is used in transportation of various goods and even in agriculture and industry.
  • Liquefied petroleum gas (LPG): LPG is used as a cooking fuel. Increase in LPG prices forces many households to use cow dung cakes and wood for cooking. To maintain low prices of LPG, the government provides subsidy.
  • Kerosene: Kerosene is consumed mainly by the poor to fulfil a variety of fuel needs such as cooking and lighting. Thus, rise in the prices of kerosene puts extra burden on the poor. To maintain low prices of kerosene, the government gives subsidy on kerosene.


The present rate of inflation is high in developing countries as developing countries are growing at higher rates. High growth rate increases the income level of people. Consequently, people make more demand of commodities leading to inflation.

However, the overall price level is higher in developed nations. This is due to the fact that in the past, developed nations have experienced high growth rate and high inflation rate than that

Indian Economy

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