Inflation and its negative repurcussions on peoples lives.

 

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 the lives of 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 goods and services. This erosion, where the nominal value of money diverges from its real market value, leads to a tangible decline in individuals’ ability to uphold their standard of living, as the cost of essential commodities and services outpaces the nominal increase in their income. This historic narrative finds resonance in Germany during the late 1920’s. Faced with reparation payments and the aftermath of a stock market crash, Germany employed the strategy of printing substantial sums of banknotes. This approach, however, proved calamitous, resulting in a severe devaluation of the national currency and a consequential and substantial diminution of the populace’s purchasing power. 

In periods characterised by escalating inflation, individuals understandably advocate for commensurate 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 various tax rates fail to adjust proportionally to inflation, manifests itself. Consequently, as individuals witness an uptick in earnings due to inflation, they inadvertently traverse into high tax brackets, incurring a concomitant rise in their tax liabilities. This scenario 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 during the tumultuous 2010’s offers an illustrative instance, where hyperinflation led to a depletion of real incomes, propelling individuals into elevated tax brackets and precipitating a discernible contraction in disposable income.

-SUJAY RAJU