Inflation affects the............ Of common people
Answers
How inflation affect common man?
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Kshitij Madduri
Answered 3 years ago
How inflation affect common man?
Inflation is defined as an increase in the general price level of an economy over a period time. It can occur due to an increase in the aggregate demand (demand pull inflation) or due to a decrease in the aggregate supply (cost push inflation). However the causes of inflation are not very important.
So to understand inflation in simple words, it basically means a decrease in the value of money in an economy over time. Now the literal value of money doesn’t decrease. It retains it’s face value. But inflation reduces the purchasing power of money.
Lets understand it better through an example- a hundred rupees note issued in 2000 still has the value of a hundred rupees even in 2017. However because of inflation, prices have risen over these 17 years. Back in 2000 lets say the price of a Kilogram of rice was INR 10. However due to inflation (and of course other reasons as well), the price today is at least INR 50 per kilogram. That means 17 years ago with 100 rupees i could have purchased 10 Kg of rice. But now with the same 100 rupees i can purchase only 2 Kg of rice. Even if the face value of the money is same, its purchasing power clearly decreased.
Now the effect on the ‘common man’ depends on what role he plays in the economy.
Borrower: Borrowers actually gain from inflation. If i borrowed lets say, 100 rupees from you with an interest rate of 5% but the inflation rate is 6%, and when i pay u back the value of the money decreases by 1%. So u lose 1% of the value of your money. However the interest rates are usually not lower than inflation and it depends from country to country.
Lenders: Lenders lose out from inflation since the money that is repaid to them is of a lower value than what they originally lent.
Fixed Income Earners: Fixed income earners are those who earn salaries. They really lose out from inflation because their income’s value decreases. Their real Income decreases.
Savers: They will lose out as the original value of what they saved decreases.
So to conclude the common man on the whole is at loss due to inflation because the purchasing power of his money decreases.
But it is the poor people and low income earners who really lose out because of inflation as they cannot afford the basic necessities like food, clothing and shelter.
Of course, the high income earners are not really affected by inflation.
Answer:
inflation affects the - of the common people