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10 Negative Effects of Inflation in Economy

Benazir Marjan is intended to use her business knowledge in the practical field through this article.


10 Negative Effects of Inflation in Economy

When prices for energy, food, commodities and other goods and services rise, the entire economy is affected. Rising process, known as inflation, impact the cost of living, the cost of doing business, borrowing money, mortgages, corporate and government bond yields and every other facet of economy.

1. Due to inflation in an economy, commodities of price get high which left a strong effect. Consumers buy less, therefore business cannot flourish smoothly. It is very much related with a country’s overall impression before the world. Slowly, GDP gets lesser than before. If GDP is slowing down, it can lead to fears of a recession which means layoffs and unemployment and declining business revenues and consumer spending.

2. Sometimes, people do syndication in time of inflation. When price of commodities go higher, some business person start doing some unethical practice like, they take away some of daily necessary items from the market and put those inside warehouse to sell in more price after some days. They take the advantage of the situation which fall an adverse effect in the economy.

3. Interest rate increases due to inflation. It affects the banking sector as well as the whole economy. Due to high interest rate small entrepreneurs discourage to take loan from bank considering the risk factor. Therefore, some potential businesses stop going ahead their function. The economy loses some expected profit which could increase GDP. Again, increased interest rate creates default issues. Some people and also companies get bankrupt as they become unable to pay back the huge amount of money (taken as loan) to the bank or other financial institutions.

4. Increased inflation rate break the sequence of any kind of financial planning. People, clients, customers, all feel some uncertainty about pursuing any kind of monetary transactions.

5. As prices of all commodities and necessary items go up, naturally it discourages in export of that particular country as foreign countries show less interest to import in high price. It creates very adverse effect on economy due to inflation.

6. Inflation rate turns very harmful effects on capital accumulation. As we know capital accumulation motivates the pursuit of profit, involving the investment of money or any financial asset with the goal of increasing the initial monetary value of said asset as a financial return whether in the term of profit, rent, interest, royalties, or capital gain. As interest rate raises so it brings less return than before. Amount of investment becomes less which brings less profit in the economy. It affects the overall goal of generating profit for both individuals and firms.

7. Inflation creates high inequality in income distribution. As the price range goes up, people fail to complete their expenses according to their budget. Middle class uses their savings for the time being. Lower class people have to suffer a lot as they have very little savings, even maximum times they don’t have any savings. As long as it takes time to rise their wages, this level of people have to strive a lot for their daily basic foods in some situation. After sometimes, middle class also starts to suffer due to rent and other expenditure. It takes time to balance the economic situation as a whole indeed.

8. Inflation has a strong impact on fixed salaried employees. As their salary is fixed, they fall in danger due to rise in price of goods and services. They have to sacrifice their regular standard of life or life style. The situation is same for retired employees who use to get a fixed amount of pension.

9. Lenders face loss due to inflation. Sometimes debtors fail to return money on time in order to meet their basic issues within a limited income. Again, debtors may defer their payback time period. These actions may put lenders in uncertain situation.

10. Inflation discourages investment in an economy. As interest rate goes up, small businesses those had a previous plan to invest in any project, they may cancel their investment. People avoid taking loans from banks. The economic growth stands still for the time which has a significant obstructive effect in future.

Therefore, considering above facts, people in all countries should keep some future preparations as much as possible to survive in any unpredictable economic situation which may arise in any time.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2020 Benazir Marjan