In a world where groceries morph into luxuries and our life savings shrink like mirages, the effects of inflation can reach quite far. Now, picture an apple costing 50 cents initially; imagine the same apple costing 50 dollars the very next day. Absurd, right? Yet, for many, this is a harsh reality. Moving on, we will dwell on how inflation shapes our lives, examining its impact on individuals, businesses, and the economy.
The most immediate impact inflation has on our lives is a decrease in our purchasing power; as prices of goods and services in the economy rise, the value of money diminishes (Krugman, 2012). Imagine a loaf of bread that cost $1 last year now costing $1.10. This seemingly slight decrease in purchasing power can significantly impact household budgets, particularly for low-income families who spend a significant portion of their income on necessities (Cantillon, 1755). The inability of poverty-stricken families to afford basic necessities could result in them finding unconventional or perhaps illegal ways of obtaining them through stealing, hiking up crime rates, and political unrest (Friedman, 1977). One of the most notable examples is the 2009 Zimbabwe hyperinflation crisis, where the inflation rate sky-rocketed to about 89.7 sextillion percent year-on-year in November 2009. This economic meltdown led to widespread poverty and desperation, many cases of social unrest, petty thefts were reported. While inflation might be just one factor attributed to this event, it was undeniably a major contributing factor.
Inflation’s impact is not felt equally by everyone, as it has an almost regressive nature, it may be a speck of dust for the rich, it is the less privileged and the poor that suffer the most, inflation widens the income inequality gap. The government introduces policies to counter inflation, such as contractionary monetary and fiscal policies, where tax and interest rates are increased, further increasing the misery of the poor by forcing them to pay more tax while limiting their spending. Furthermore, these factors lead to a decrease in overall living standards in the economy.
Rising costs of raw materials, labor costs, and demands for higher wages due to inflation can pose serious threats to domestic businesses in the economy, significantly decreasing profits and squeezing margins. Moreover, companies are then forced to hike up prices due to cost-push inflation, which further fuels inflation. Looking back in the 17th century, one of the most dominant forces in the world, the Spanish Empire collapsed due to the ‘Spanish Price Revolution’, a series of inflationary periods where prices rose by 1.2% per year, leading to prices rising by sixfold in 150 years. The crisis mainly occurred due to a high influx of gold and silver from the ‘New World’.
Shedding some light on the other side, interestingly, a moderate rate of inflation is, in fact, key for economic growth and prosperity, as it increases spending and borrowing, encourages businesses to invest, increases their profits, and creates more potential employment opportunities.
Reference List
Blanchard, Olivier Jean. (2016). Macroeconomics. Pearson Education.
Cantillon, Richard. (1755). Essai sur le commerce en général. J. Mossy.
Friedman, Milton. (1977). Nobel Lecture: Inflation and Unemployment. Nobelprize.org.
Piketty, Thomas. (2014). Capital in the Twenty-First Century. Harvard University Press.
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