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Meaning of Inflation: & What are the effects of inflation?

Meaning of Inflation:

In ordinary language, Inflation means a process of sustained rise in prices. A situation is said inflationary when either the prices of goods and services or the supply of money are rising. In the words of Coeburn,

“It is a case of too much money chasing too few goods”.
          In the words of Friedman,
“Inflation is always and everywhere a monetary phenomenon… and can be produced only by a more rapid increase in the quantity of money than output.
But majority of the economists do not agree that money supply alone is the real cause of inflation. Harry W. Johnson, F. S. Broon and Edward Shapiro share the view that.
“Inflation is a Situation wherein a persistent and appreciable rise in the general level of prices takes place.”

Meaning of Inflation & Effects of inflation

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Effects on distribution of income and wealth: Inflation brings changes in the distribution of real income thus it causes to redistribution of income and wealth. Due to inflation the poor and middle class people have to suffer losses because their wages, salaries and other sources of income remain fixed but the prices of goods continue to rise. They become poorer than before.

Effects on production: Rising price are sign of encouragement to the producers. They become hopeful to earn great profits in the future. They prefer to invest more expecting higher profits in future. This tends to increase production, employment and income.

Effects on the government: Inflation also adversely affects the government financial position in various ways. It enables the government in financing its activities through inflationary finance. Money income of the people rises due to inflation, government can collect increased portion through imposing taxes on income and goods. The government revenue rises during inflection.


Salaried Class: Salaried person such as clerk, teacher, and workers and other white collar persons have to suffer a loss when inflation is there. The reasons that salaries don’t increase at the same rates prices rise. So they cannot adjust their salaries as well as the cost of their standard of living to the rising price.

Wage earners: During inflation wage earners can earn or lose. It, however, depends upon the rate at which their wages are adjusted to the rate of inflation.
If their trade unions are strong enough to get their wages linked to the cost of living index then they will be able to protect of themselves from the adverse effects inflation.

Businessmen: The person engaged in all types business, such as production; trading and dealing in real estate, gain during the period of inflation. In case of production, when prices of manufactured goods rise, the values of their stock also rise. So Producers earn more profit when they sell their stock. Traders also enjoy the same luck the holders of real estate also gain during inflation. Tor the prices of landed property raises much faster than the general prices level.

Agriculturist: The agriculturists who are landlords have to suffer a loss during inflation because they have to content with fixed rents. Similarly, landless agricultural workers are also as hit hard by inflation because their wages are not raised by the landlords contrarily peasant proprietors who own and cultivate their lands will gain from inflation because prices of farm products increase more than the cost of production.


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