For me Income tax is a tool by which the government legally takes money from my hands and Inflation is that criminal who takes money from hand without my knowledge. I would like to call him the faceless yet fearless criminal.
The spiraling inflation is bringing down the abilities of people to buy goods and services, and it becomes even more sinister when the inflation comes in the form of high food prices. Food inflation hits all citizens but more so for the poor who spends a very large proportion of their income on food. Rising food prices could lead to the poor becoming poorer and alter the consumption pattern in most households. The increased spend on food would reduce the consumption of other products and services thereby affecting the "general demand economics" of the economy. Like what happened in the US, when consumption falls the economy goes into slump.
Inflation thus can destabilize the economy, bring about massive social ramifications. Algeria has already seen food riots break out.
Inflation is caused by various Factors
Excessive demand over and above the Supply can lead to higher prices
- Increased salary/Wages in the hands of consumers can increase demand
- Increased speculative activities done by unscrupulous individuals/organizations like hoarding/Trading
- Excessive printing of currency notes by a country without adequate reserves.
- Increased circulation of Black money
Supply Constraints leading to higher prices
- The per capita income in India has increased by 40% but the supply of food articles have not increased proportionately.
- Reduced acreage of food grain production coupled with increase in population.
- Seasonal changes bringing about sudden shortages of food articles.
- Diminishing resources (Rare Earth Metals, Gold, Oil) but look at the increasingly number of Cars being bought.
In order to fight this Inflation usually the governments across the world follow some simple steps. Just so that you know these are just temporary policies and not enough to fight this primitive enemy.
- Tweaking of monetary policies resulting in higher interest rates. Higher cost of borrowing will make money dearer thereby reducing consumption. Like every medicine has its side effects, this one's side effect is that it can lead to big time problems in growth and unemployment.
- Increasing supply of goods. Easier said than done, it has its own gestation period and needs proper execution and long term commitments from governments across the world.
- Governments can reduce duties on goods and services imported to bring about momentary relief. Assume the government of India decides to cut duties on oil imports it could bring down the price of petrol to Rs 45.
- For the poor, government could provide food and other articles at subsidized rates. Again this could lead to increased debt burden for the country, thereby forcing the government to print more notes.
These are all short term measures, until we bring about structural changes in consumption and production, inflation is going to be an ever resurfacing evil.
On a second assumption i think the poor, could be benefited, if the minimum wage is indexed to inflation they would about break even. So if these minimum wage earners are deep in debt inflation actually helps them.
ReplyDeleteThe reason for this is that the debtors would have borrowed valuable money sometime back and the amount to be repaid must be fixed. So over a period of time the value of the rupee they must repay is less and less (it becomes easier & easier to obtain that amount). This is called repaying with "cheaper money".
However, bigger beneficiaries would be the average middle class person with a large mortgage because the debt is for a longer term so inflation has longer to work it's "magic".
Inflation affects them especially hard because the prices of things they buy go up while their income stays the same. In addition, the poor are generally renters so they don't even benefit from a "cheaper" mortgage while they are paying higher prices for their groceries.
ReplyDeleteAlso even though their wages may be indexed to inflation there is a time lag since it is usually only re-indexed once a year or in case of our central governemnt employees once in 5 years. During this time they are on the old wages while prices for things they buy have already gone up.
Inflation works as a hidden tax because the government borrows money from investors. It spends this valuable money and then gets to pay back its debt with cheaper rupee.
The poor unsuspecting investor who is convinced that Government notes, bonds and T-Bills are "Low-Risk investments" accepts these notes at face value but before long realizes that they are not able to buy goods they could afford earlier, with the returned amount they loaned to the government in the first place.
On a small scale lenders are the losers from inflation and borrowers are the winners(only if they have fixed rate loans) but on a bigger scale the biggest beneficiary is the Government and the overall economy(common man) is the biggest loser.