What are the Effects of Inflation on Economy, individual & Business

Fri, 07/05/2013 - 10:31 -- Umar Farooq

By inflation we mean rising of prices but on the other hand it is also a reduction in the value of money. The reduction in the value of money affects the entire economy. The effects of inflation on economy, individual & business discussed in the following words.

Impact on Investment & Employment

When the price level tends upward the investment attitude flourish among the businessmen with the aim to earn more profit. Businessmen inject more money into their businesses so as to enhance their production. For the purpose they employ more land, more capital and more labor thus employment is also increased. Increase in prices is associated with rising investment and high employment

Businessmen and Industrialists

Rise in the general price level is always liked and welcomed by the businessmen and industrialists. As these cost in the form of taxes, wages, interest on capital etc. almost remain unchanged but the price of these products is increased which yield them more profit than before. On the other hand falling prices bring them bad prospects as their cost of production remains almost the same but the prices of their products fall which is a cut on their profit margin.

Creditors and Debtors

When prices are rising it badly affects those people who have given loan to others (creditors) because when the loan is returned by the debtors its value is decreased. Contrary to it, those people who have taken the loan (debtors) are benefited because they have to return the same amount which they had taken but with depreciated value. On the other hand when prices are falling those who give loan (creditors) are advantage while those who receives (debtors) it are affected adversely.

Fixed Income Groups

Those people who earn a fixed income like pensions, interest, unemployment allowance etc. are badly affected as the rising price are not followed by increase in their income, however when prices fall their purchasing power boost up.

Effects on Production

Rising prices boost up the profit margin of the businessmen therefore they expand their business through further-investment with a view to earn more profit. Thus inflation has a positive impact on the production. The situation will be opposite if the price level falls.

Wage Earners

Usually wage earners get less wages against their services, therefore with a fall in prices their wages and incomes do not affect while in the case of rising prices, their wages do not increase accordingly or with tit same rate which cause them losses,


Farmers are directly affected by inflation because when the general price level rises, the price on agricultural based goods also rise which earn them more income than usual earnings. On the other hand when the general price level falls, the prices of agricultural goods also fall which cause them loss as those goods cannot be stopped from selling.

Effects on Income Distribution

Inflation has serious repercussions on the income distribution. Rising prices increase the profit margin and businessmen thus adding more and more to their wealth while on time other hand the purchasing power of the poor people is further reduced. At one side their income remains low and at the other side the value of money is reduced.