Impact of Inflation on Business and Society | Top Ranked MBA college in Bangalore

Posted by Susmitha TP On 08/04/2022 11:49:53

The term "inflation" is frequently used to refer to the alleged causes of the phenomenon. When the quantity of money exceeds the supply of goods and services, inflation occurs. Alternatively, the financing of budget deficits is responsible for inflation. A deficit budget could be financed through the creation of new money. However, monetary expansion or a budget deficit may not result in price increases. As a result, defining 'inflation' is problematic. MBA college in Bangalore

Inflation is defined as a "consistent upward trend in the general level of prices," not just the price of one or two specific items. Inflation is defined as "a consistent and noticeable rise in the general level or average of prices," according to G. Ackley. Inflation diminishes money's purchasing power. A minor or rapid increase in prices is not inflation because it may represent the market's short-term workings. Top Ranked MBA college in Bangalore

Inflation has a direct influence on businesses in two ways: 

  • When prices rise, firms have to pay more for raw materials, manufacturing, and overhead. While passing all expenses to consumers may appear to leave a business largely untouched, in reality, businesses will absorb a portion, if not the majority, of the additional prices to avoid losing customers.
  • When inflation rises, customers' purchasing power diminishes, meaning they can now buy fewer products and services than before. This means that enterprises will have decreased sales, lowering their total revenue.

The effects of inflation fluctuate depending on the type of business. Non-essential goods and services are less affected than essential goods and services. In a market or sector where there are a lot of sellers, raising prices means risking losing clients to a competitor who is ready to keep pricing the same. Brand strength correlates to pricing strength. Consumers are more receptive to a price increase when products associated with great brand power have a significantly more inelastic demand. Best B-school in Bangalore

The other Impacts of Inflation on society are;

Favorable; 

  • Typically, inflation benefits product manufacturers. Because they can offer their items at higher prices, they make more money. 
  • Investors and entrepreneurs benefit from increased incentives to invest in productive activities during periods of inflation. As a result, they earn more money. 
  • Producers produce more goods and services after receiving the appropriate funding. As a result, inflation causes more products/services to be produced. 
  • As output grows, demand for other production elements, such as manpower, grows as well. As a result, during inflation, employment and income rise.
  • If a company's profits are higher than expected, it might pay dividends to its shareholders. As a result, during inflationary periods, owners might expect an increase in dividend income. 
  • Money loses its purchase value as a result of inflation. As a result, if the borrower pays an interest rate that is lower than the rate of inflation, he benefits from the process.

Unfavorable:

  • This means that persons on fixed incomes, such as salaried workers and retirees, will see a decrease in their real income. In other words, they will have less purchasing power. 
  • Businessmen and businesspeople benefit from inflation because their profits increase. People in fixed-income groups, on the other hand, see their real income decrease. As a result, during this period, income disparity is at its peak.
  • Goods, raw materials, and factor services all rise in price as inflation occurs. As a result, any investment project started during the planning period will require additional money from the government to complete. The entire planning process is put off if the government fails to raise more financial resources through savings or taxation. 
  • The rate of price increase is really rapid. People are unsure how much costs will increase in the next weeks and months. Many people begin making speculative investments in such circumstances. Such investments do not contribute to the economy's ability to generate productive capital.
  • It is stated that debtors gain from inflation when it has a favorable influence. As a result, lenders risk losing money at these times. 
  • During inflation, the cost of export commodities rises as well. As a result, their demand in foreign markets may decline, resulting in a reduction in the country's export revenue.

In short, inflation is one of the most important macroeconomic variables and one of the most feared by economic actors, including the government, because it can alter the structure of production costs and welfare levels. In addition, wider repercussions such as instability, economic growth, a loss of competitiveness, the interest rate, income inequality, and unemployment are on the rise.

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