Inflation affects a country’s economy, social conditions, political, and moral lives of its citizens. Inflation does not equally affect the incomes of the various segment of people. The group that suffers the most as the purchasing power of incomes is significantly reduced are the creditors and fixed income earners such as pensioners. Additionally, all incomes and properties that have fixed values such as bonds, insurance policies, rental incomes, pensions, and salaries depreciate to the degree of inflation. Those who gain from the increase in prices or benefit from inflation include business people, government, debtors, and shareholders. People in business will benefit because their costs of production will not rise rapidly as the prices increase. Hence their profit margin will increase. On the other hand, debtors will benefit from inflation by repaying less than what they owned in regards to the real value. Shareholders who do not carry fixed rate will gain from significant dividends from higher profits of the businesses.
Inflation results in a rise in the number of investments in the short-run. When the price level of goods first rise, the price level of raw material, wage rates, and interest on loans may not instantly increase. Hence, the cost of production will not rise instantly as prices begin to increase, but gradually than the prices.
The effects of inflation on imports will depend on the elasticity of demand for imports. During inflation, the value of money declines. Hence, people have less incentive to save since the prices are increasing.
During demand-pull inflation, the producers’ product more output to meet the increasing demand for services and goods. Demand-pull inflation results in inefficiency in the production process. On the contrary, if there is cost-push inflation, it may be because of minimum wage legislation. The producers will reduce their costs of production that is they may lay-off their less productive labours at the same time producing less or more of the same quantity of output. Cost-push inflation results in increased efficiency in the production process.