Inflation and its effects on people.

 What impact does inflation have on people's lives?

Inflation, the sustained and extensive rise in the prices of commodities and services within an economy over a period of time, arises from a disjunction between excessive demand and constrained supply. It impacts the lives of people and the economies they reside in, in three profound ways : reducing people’s purchasing power, fiscal drag, and the reduction in unemployment. Analysing the potent influence of historical events such as the 1920s stock market chaos in Germany and the hyperinflation faced by Venezuela offers poignant illustrations of inflation’s far-reaching ramifications, significant in highlighting its intricate effects on individuals.

Inflation’s foremost impact lies in the pervasive reduction of purchasing power. As inflation intensifies, the currency’s precipitous devaluation ensues, diminishing its capacity to acquire commodities. This erosion, where the nominal value of money diverges from its market value, leads to a tangible decline in individuals’ ability to uphold their standard of living, as the cost of goods and services outpaces the increase in their income. This narrative finds resonance in Germany during the late 1920’s. Faced with reparation payments and a stock market crash, Germany employed the strategy of printing substantial sums of banknotes. Such an approach, however, proved calamitous, resulting in a severe devaluation of the national currency and diminution of people’s purchasing power. 

In periods characterised by escalating inflation, individuals understandably demand wage increases to offset the augmented cost of living. While this response may seem judicious, it introduces inherent complexities. Fiscal drag, a phenomenon wherein income thresholds determining tax rates fail to adjust proportionally to inflation, manifests itself. Consequently, as individuals witness an uptick in earnings due to inflation, they traverse into high tax brackets, incurring a rise in their tax liabilities. This is elucidated by the principle of progressive taxation, wherein higher-income earners bear a proportionately greater share of tax burdens,leaving the population with a decreased amount of disposable income. The case of Venezuela is one such example, where hyperinflation led to a depletion of real incomes, propelling individuals into elevated tax brackets and significantly contracting their disposable incomes.

Despite its adverse repercussions, inflation can, under circumstances, be construed as a boon for an economy and its populace. One notable advantage lies in its potential to mitigate unemployment. As inflation stimulates spending by eroding the real value of money, it catalyses economic growth. The surge in demand compels businesses to expand their operations, thereby creating job opportunities, hence reducing unemployment. This inverse relationship between unemployment and inflation contributes to a more robust, dynamic, and self-sustaining economic growth.

Inflation's dual nature poses challenges through reduced purchasing power and fiscal drag. Yet, its potential to spur economic growth and alleviate unemployment emphasises the need for nuanced policy strategies in managing its consequences.

References

-What happens when inflation and unemployment are positively correlated? Greg Depersio, Ed Toby Walters. August 22,2020. [http://tinyurl.com/8j78awph] / last accessed 19 Dec 2023

-Pete Comley, Inflation Matters.Tottenham court road, London, 2015

-Bamford, Colin. Economics for Cambridge international. United Kingdom, 2021

-What causes Inflation. Kat Tretina and Benjamin Curry. Oct 13th 2022. [http://tinyurl.com/3t2ef5ut] /last accessed 17 Dec 2023.

-Ferguson Adams. When money dies : The nightmare of Deficit spending, Devaluation, and hyperinflation in Weimar Germany.

- The effects of inflation on the economy. Sarah Sharkey. July 20th 2023. [https://www.quickenloans.com/learn/effects-of-inflation] /last accessed 12th Dec 2023.