What is the impact of inflation in economy?

Answer 1

Inflation is caused due to several economic factors:

• When the government of a country print money in excess, prices increase to keep up with the increase in currency, leading to inflation.
• Increase in production and labor costs, have a direct impact on the price of the final product, resulting in inflation.
• When countries borrow money, they have to cope with the interest burden. This interest burden results in inflation.
• High taxes on consumer products, can also lead to inflation.
• Demands pull inflation, wherein the economy demands more goods and services than what is produced.
• Cost push inflation or supply shock inflation, wherein non availability of a commodity would lead to increase in prices.

Problems

The problems due to inflation would be:

• When the balance between supply and demand goes out of control, consumers could change their buying habits, forcing manufacturers to cut down production.
• The mortgage crisis of 2007 in USA could best illustrate the ill effects of inflation. Housing prices increases substantially from 2002 onwards, resulting in a dramatic decrease in demand.
• Inflation can create major problems in the economy. Price increase can worsen the poverty affecting low income household,
• Inflation creates economic uncertainty and is a dampener to the investment climate slowing growth and finally it reduce savings and thereby consumption.
• The producers would not be able to control the cost of raw material and labor and hence the price of the final product. This could result in less profit or in some extreme case no profit, forcing them out of business.
• Manufacturers would not have an incentive to invest in new equipment and new technology.
• Uncertainty would force people to withdraw money from the bank and convert it into product with long lasting value like gold, artifacts.

Inflation in India Economy
India after independence has had a more stable record with respect to inflation than most other developing countries. Since 1950, the inflation in Indian economy has been in single digits for most of the years

Between 1950-1960
The inflation on an average was at 2.00%

Between 1960-1970
The inflation on an average was at 7.2%

Between 1970-1980
The inflation on an average was at 8.5%.

Inflation At Present
Inflation in India a menace a few years ago is at a 30 year low. The inflation ended at a low of 0.61% in the week ended May 9, 2009 this after reaching a 16 year high of 12.91 % in August 2008, bringing in a sigh of relief to policymakers.