Economical Effects of Inflation

Economical Effects of Inflation on a country

Inflation can be described as a positive rate of growth in the general price level of goods and services. Carbaugh (2001) claimed that inflations are most probably the outcome of either an upward pressure on the buyers’ side of the market (demand-pull inflation) or an upward pressure on the sellers’ side of the market (cost-push inflation). More often than not, economists agree that inflation is bad and also a defect of an economy because, over time, it destroys the value of money. (Kwok Seng, 2002) In general, inflation touches on the economic behaviours that can have substantial impacts on the operation of the economy, but that of course would depends on whether the inflation is an outcome of anticipated or unanticipated inflation and the degree of inflation as well. (Case & Fair, 2004)

Redistribution of wealth and income

Samuelson & Nordhaus (2005) have said that inflation affects income and wealth unevenly across the population due to the fact that there are differences in the assets and liabilities that people hold and that redistribution occurs because many loans in the economy are stated in terms of money. Suppose you borrow RM300, 000 to buy a house and your annual fixed-interest-rate mortgage payment are RM30, 000. Suddenly a great inflation doubles all incomes. “You will need to work half as long as before to pay your mortgage payment because the inflation has increased your wealth by cutting half the real value of your mortgage debt.” (Samuelson & Nordhaus, 2005: 673) With inflation the sum of money being repaid over time will buy less goods and services than at the time the loan was made, the value of money gets down gradually while the loan remain constant and that the borrower will gain at the expense of the lender. (Kwok Seng, 2002) What is more, during inflation people who have higher bargaining power would be better off as they are able to raise their income above the inflation that occurs, in turn, their real income increased and the opposite would goes to those who has low bargaining power or those on pensions plan.

The German hyperinflation in 1923 has eliminated the value of all life insurance policies and debts left in banks. The value of German mortgages in 1913 measured in U.S. dollars was about $10 billion; in late 1923 these mortgages were worth only one U.S. penny. By 1924 the inflation had almost completely redistributed the wealth of Germany. (Schenk, 1998)

The