Spiraling Curve of Inflation

Everyone these days is talking about inflation. Its impact, ways to reduce it, etc. Ever wondered what actually this word means and how it impacts you as an individual and the society / country in general. Let me try to explain it in simple words its impact on individual and the country.

High inflation means things getting costlier. You must have experienced that during the periods of high inflation the cost of edible items, commodities, transport, etc go up. As a result you end up paying more for the items of daily consumption causing your budget to go for a toss. This is the direct impact of inflation on an individual, isn't it :)

Now let’s broaden this scenario and see its bigger picture on the country. As sen above as a result of higher costs you start purchasing less. Since the same situation of higher costs is being faced by others in the society, slowly they also start purchasing less. With less purchasing by the society companies making these products start feeling the heat. Due to low demand (read consumption) they tend to decrease their output (production). This decrease in production by companies impacts the purchase of the raw material which they used to procure from the market. Hence we see that the increasing cost, causes the overall decrease in consumption and lesser production. Lower production means the companies need lesser number of people in their factories, plants, marketing teams, etc. So inflation indirectly leads to increased unemployment.

Also due to reduced purchasing by society, cash flow decreases in market, causing liquidity crunch. Banks are forced to increase the interest rates, causing borrowing to become costlier. Due to increased interest rates companies prefer not to borrow or even if they borrow they end paying more interest increasing their cost of production. This leads to lower margin and lesser profit for the companies. Companies then find themselves in a catch 22 situation. If they resort to cost cutting measures like lower salary, lesser appraisals this would lead to decreased purchasing power of people further increasing the liquidity crunch in the market. On the other hand if they increase the price of products, this would make people to buy less, further decreasing the consumption of their products.

There are many more indirect impacts of inflation, like depreciating currency, low GDP, etc. I would not go into all of these impacts here in this article. But as you would see most people only think that inflation is impacting them directly by burning a hole in their pockets, but its impact is not only on individuals but on the contrary it impacts the whole economic system of the country. In a nutshell the inflation should always be moderate and under control.