Impacts of inflation to different group of people

By | July 13, 2013

1.1    Real estate owners

 

Values of fixed assets could rise, making some Companies more financially secure. Traditionally higher Inflation often leads to higher prices, therefore fixed assets in theory should rise in value (ezinearticles.com 2009). The usual raise of asset price could be apprehended in the rationality that because during inflation, cash become unpopular as it is directly affected by the inflation rate, therefore, inflation discourages people from keeping money in liquid form, in other words, in the form of cash. Therefore, money is usually invested in the non-cash manners such as property. With more money moved away from cash and capital market to the real estate industry (Greylin 2008, p.164). But there are also threats imposed by inflation to the property owners. As just said, money is usually attracted into the property market when inflation become apparent, therefore, many real estate owners are originally not asset owners, they become the asset owners in the half way. As a result, when inflation stops suddenly, the price of asset would also fall accordingly and some of these later asset owners could suffer loss because of the fall of the asset price.

 

1.2    Holders of money and people with fixed incomes and fixed pensions

 

As inflation is a sustained increase in general level of prices, the most apparent groups to be affected are the holders of money and people with fixed incomes. As price increases, money has less purchasing power than it was before the inflation time, it is not advisable that large amount of cash to be held on hand. On the other hand, those with fixed incomes who are usually relying on salaries to live would also face challenges from the inflation. And if their salary would not be increased accordingly or increased in a later time, there would be a period of time when the income is fixed and price of consumer good increase, and the life qualify and standard of them would be lowered. But there are also opportunities for the holders of money and people with fixed incomes to reduce the negative impacts of inflation. With the expected coming of inflation, these future victims could reduce the holding of cash on hand and invest in the property or in the other industries. But for those who hold fixed pension, because the realized real interest rates are lower than nominal interest rate, it would hurt people who are depending on the fixed pensions by wiping out the purchasing power of a lifetime saving. And usually such risks could not be significantly reduced as these people could have no additional money to invest in other purposes.

 

1.3    Debtor and creditor

 

As most loan agreements specify a nominal interest rate which is based on the rate of inflation prevailing at that time, hence if inflation is on the higher side than expected, then the debtors win and the creditors lose as debtors repay the loan with less purchasing power. In another world, the inflation would redistributes wealth between debtors and creditors (Deepashree & Agarwal 2007, p.6). And apparently, with the well defined terms regarding the setting of the nominal interest rate, the debtor would benefit from the transaction while the creditor lose, if the creditors would be afraid of the sudden increase of the inflation rate, they can add some special terms and conditions in the contracts saying that the interest rate would need to be adjusted if the inflation rate growth increase by some degree.

 

1.4    Entrepreneurs, business men and farmers.

 

According to Saleem Shaikh (2010, p.323), inflation is welcomed by entrepreneurs and business men as they stand to profit from the raising prices. They find that the value of the then inventories and stock of goods is rising in money terms. They also find that the prices are rising faster than the cost of the production, such as the cost of labor, materials and machine maintenance, so that their profits margin is greatly enhanced. These business community, therefore, gets supernormal profits during the term of inflations, and those profits continue to increase as long as the prices raise. Similar scenarios could also be found among the farmers because they are also benefiting from the increase of prices since their investment in the farming had been done right before the increase of the prices, as a result they also benefit from the inflation.

 

Leave a Reply