Examine the effects of inflation on the economy of your country

Inflation is defined as a “general upward price movement of goods and services in an economy.”

Positive effects of inflation

• It stimulates people’s efforts. People tend to work harder during inflation so as to maintain their material wellbeing
• It leads to increased production. Production is more profitable during times of inflation because of high prices
• Government revenue from taxes increases because of high income. Hence the government is able to finance projects.
• Full utilization of resource to increase production. Including redundant resources such as clay for pottery and scrap for iron and steel production.
• Entrepreneurship is stimulated. Due to high level of profit
• Inflation leads to fair distribution of incomes and wealth. People holding stock and shares of companies which do not carry fixed rate of interest tend to gain during inflationary situation.
• Rural urban migration is discouraged. Due to high cost of living in towns
• It results into industrialization. Due to high profits.
• Boosts Real Estate, Energy, Value Stocks since landlords can protect themselves against inflation by raising rents, even as inflation erodes the real cost of fixed-rate mortgages.
• Stimulates labour mobility and labour efficiency

Negative effects of inflation

• During inflation money losses value; thus creditors lose in terms of real value while debtors gain
• It leads to income inequality. This because fixed income earner receive less and lose in real term while business people gain in price increases.
• Reduces purchasing power
• Hurts the Poor Disproportionately. Lower-income consumers tend to spend a higher proportion of their income overall and on necessities than those with higher incomes, and so have less of a cushion against the loss of purchasing power inherent in inflation.
• Leads raising bank interest rates
• It worsens the government’s budget deficits. During inflation governments revises its plans and contracts which is quite expensive.
• It leads to rural-urban migration since people tend to leave less paying jobs like agriculture and run for urban jobs.
• It discourages people from keeping money in the bank and at home and prefer keeping money in real assets.
• It worsens a country’s balance of payment position because countries do not like to import from countries experiencing inflation.
• Inflation requires a country to carry out devaluation from time to time which makes imports expensive leading to import inflation.
• Inflation discourages investment.
• It worsens the value of local currency. People therefore prefer to hold money in form of foreign currency.
• Inflation encourages speculation and speculation leads to hoarding of essential commodities. This worsen people’s standards of living.
• It leads to political anarchy because people resent regime in power.