Inflation exists whenever the supply of money is more than the goods and services available. It is the constant upward trend of the price level. It is not actually the high prices but the rising level of price which constitutes inflation. It can be considered as the devaluation of money’s worth. With a unit of currency, you will be able to buy less. It is also a recurring phenomenon. However, a sudden increase in price or a small increase in the price level will not be considered as inflation as it will be reflecting the workings of the short-term market. The inflation affects all segments like employment, investment, salaried people, shareholders, debenture holders, debtors, creditors, etc. The major impact is on business and in turn, affects economic and productivity growth of the country.
Production and economic impact of the inflation
The inflation will not always result in higher output. Inflation will at times have a favorable effect on the production. Usually, the profit is considered as a rising function of the level of price. The inflationary situations force the business organization to increase the product’s prices. The rise in price and profit urges the organizations to invest in a larger amount. This investment’s multiplier effect will, in turn, result in generating higher national output. But, this favorable inflation’s effect will be only there for a temporary period till the production costs and wages rise rapidly.
Furthermore, if the inflation is of the cost-push type then it will be associated with output fall. Hence, there is no actual relationship between output and prices. If the demand increases, it will result in increases both output and prices but in case of a supply shock, the price will increase but the output will be reduced.
The inflation will bring down the production level. When there is a prolonging inflation, the business organizations will not be able to ascertain their revenues and costs accurately. Risks element will be more. The business organizations would be very much reluctant to make more investments and to get into long-term commitment because of the uncertainty of future inflation. In this situation, the growth of the economy will be hit badly.
For an economic growth, low rate of inflation is necessary. The mild inflation will have an overall encouraging impact on the national output. The economic growth in the long-run is affected by the high inflation rate. Also, the hyperinflation lowers the savings habit of both the business organizations and individuals.