Inflation: Benefits & Effects on Unemployment & Economy - Essay Sample

Introduction

Inflation is described as a substantial increase in consumer goods and services prices which is calculated by use of non-seasonally adjusted Consumer Price Index (CPI) (Inflation-linked, 2019. The CPI is a reliable inflation calculator as experienced by people in their daily expenses commonly referred to as the cost-of-living index. Pettinger (2017) states that positive effects of inflation include reduction of unemployment as a result of minimal wage rigidity, gives freedom to the central bank to execute monetary policy, encouraging loans investments instead of money hoarding, as well as preventing deflation inefficiencies. The negative effects include an increase in money holding opportunities, low savings and investment as there is uncertainty over future inflation, and in some cases shortages of goods since consumers hoard money out of concern that prices might rise in the future.

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Parties likely to benefit from inflation are borrowers, stocks investors, fixed-rate mortgage holders and commodities investors. According to O'neill (2011), inflation affects economies both negatively and positively. Stocks investors benefit from inflation as they acquire since the same components that increase the prices of goods and services comparatively increase their companies' value. Notably, equity value varies proportionally and directly with inflation and when the wages and prices double, so does the stocks' value as well as profits. Also, commodities investors benefit in that prices of commodities closely track the rate of inflation rate. These investors benefit by purchasing storable goods such as gold which are a good hedge against inflation. The basic rule of inflation is that the currency value declines with time and when a business venture borrows money, the money is set to be paid back with money earned from the business. Therefore, borrowers pay back their loans with less value cash compared to when they originally received it. Also, fixed-rate mortgage holders benefit significantly from inflation rise as they pay back with devalued cash. The inflation rise notably helps property owners particularly those who purchased their homes at the peak of a real estate boom and currently owe more than their home's value by building equity quicker.

On the other hand, parties likely to lose from inflation are workers stuck on fixed wage contracts, borrowers on variable mortgage rates, and savers. Inflation rise compels the central bank to increase interest rates resulting in higher rates of borrowing. Therefore, mortgage owners with variable mortgage rates experience notable increment in their mortgage settlements (Riley, 2016). Another potential loser from inflation are workers stuck on fixed wage contracts. Assuming that these workers have a wage freeze and inflation rises by 5%, this automatically means that their purchase wages will be 5% less at the end of the year in comparison to the start of the year (Riley, 2016). Notably, this is common especially in cases of workers whose jobs do not have a union and therefore they have weak bargaining power to demand for higher nominal wages in to keep them at per with the rising levels of inflation. In most cases, the negative real wages period significantly affect people living close to the poverty line to an extent that even a slight increase in prices can make it more difficult to buy basic goods and services. Workers with significantly higher wages are likely to absorb a fall in real wages. Savers as well are not left behind in the list of inflation losers. Once there is a rise in prices of goods and services, the value of money declines resulting in decline of their savings value. In hyperinflation periods for instance, consumers who had saved all their life are likely to witness their savings value wiped out because their savings are rendered worthless with higher prices. However, savers can be safe from inflation menace if they can obtain an interest rate higher than the rate of inflation.

Conclusion

In conclusion, it is evident that parties likely to benefit from inflation are borrowers, stocks investors, fixed-rate mortgage holders and commodities investors. On the other hand, parties likely to lose from inflation are workers stuck on fixed wage contracts, borrowers on variable mortgage rates, and savers. Also, it is clear that inflation has positive effects such as reduction of unemployment as a result of minimal wage rigidity and prevention of deflation inefficiencies. The negative effects include an increase in money holding opportunities, low savings and investment as there is uncertainty over future inflation, and many others.

References

Inflation-linked. (2019). Inflation-linkedcom. Retrieved 16 August, 2019, from http://www.inflation-linked.com/priceindex.asp

O'neill, B. (2011). Rutgersedu. Retrieved 16 August, 2019, from https://njaes.rutgers.edu/money/pdfs/lesson-plans/DoE-Lesson-Plan-4-Planning-Saving-Investing.pdf

Pettinger, T. (2017). Economicshelporg. Retrieved 16 August, 2019, from https://www.economicshelp.org/blog/315/inflation/inflation-advantages-and-disadvantages/

Riley, G. (2016). Tutor2u. Retrieved 16 August, 2019, from https://www.tutor2u.net/economics/reference/inflation-consequences-of-inflation