The Negative Effects of Inflation on the distribution of income essentially consist of the displacement of wealth from creditors to debtors.The most negative effect of inflation is that money loses value and purchasing power suffers: with the same amount of money, the same amount of goods and services cannot be purchased as before.
12 Negative Effects of Inflation You Must Understand.
Debtors and Creditors:
During the period of rising prices, debtors gain and creditors lose. When prices rise, the value of money falls. Though debtors return the line amount of money but they pay less in terms of goods and services.
this is because the value of money is less than when they borrowed the money. Thus the burden of the debt is reduced and debtors gain whereas creditors lose.
- Salaried Persons:
Salaried workers such as clerks, teachers, and other white-collar persons lose when there is inflation. The reason is that their salaries are slow to adjust when prices are rising.
- Wage Earners:
Wage earners may lose during the period of rising prices, because I here is often a time lag between the raising of wages by employers and I he rise in prices. So workers lose because by the time wages are raised, 11 ic cost of living index may have increased further.
- Fixed Income Group:
Pensioners, recipients of interest and rent belong to the fixed income group. All such persons suffer loss because they receive fixed payments because the value of money continues to fall with rising prices.
- Equity Holders:
Persons who hold shares of companies, which do not carry a fixed rate of interest, gain during inflation, because the rising prices expand business activities, which increase the profits of companies. As profits increase, dividend on equities also increase at a faster rate than prices.
Negative Effects of Inflation In Country And Society
Businessmen of all types, such as producers, traders and real estate holders gain during period of rising prices. The reason is that their costs do not rise to the extent of rise in the prices of their goods. This is because prices of raw materials or other inputs and wages do no; rise immediately to the level of the price rise.
Landlords lose during rising prices because they get fixed rents. But peasants, who own and cultivate their farms, gain because ices of
farm products increase more than the cost of production. On the other hand, the landless agricultural workers are hit hard by rising prices. The farm owners do not raise their wages because trade unionism is absent among them.
When prices start rising then production is <ncouraged. Producers earn windfall profits in the future. They invest more in anticipation of higher profits in the future. But this is only possible up to the full employment level.
- Distribution of Income and Wealth:
Inflation tends to increase inequalities in the distribution of income and wealth. The poor and middle class suffer because their wages and. salaries are more or less fixed but the prices of commodities continue to rise. On the other hand, businessmen, industrialists, traders, real estate holders, speculators, and others with variable incomes gain during rising prices.
Inflation helps the government in financing its activities through inflationary finance. As the money income of the people increases, government collects that in the form of taxes on incomes and commodities. In this way, the revenues of the government increase during rising prices.
11 Balance of Payments:
Inflation affects adversely the balance of payments of a country, when prices rise more rapidly in the home country than those of foreign countries. Home products become costly as compared to foreign products. This tends to increase imports and reduce exports, thereby making the balance of payments unfavourable for the country.
Inflation is harmful socially. By widening the gulf between the rich and the poor, rising prices create discontentment among the masses. Pressed by the rising cost of living, workers resort to strikes, which lead to loss in production. Lured by profit, people resort to hoarding, black marketing, adulteration, manufacture of substandard commodities, speculation etc. Corruption spreads in every walk of life.