Opportunities and problems for the winners and losers of inflation

By | June 26, 2013

1.        Opportunities and problems for the winners and losers of inflation

 

1.1    Business men

 

1.1.1            Opportunities: Enhanced business growth with controlled growth of inflation for business men

 

According to E. Wayne Nafziger (2012 p. 472) business people usually benefit from inflation, as product prices tend to rise faster than resource prices. For example, based on the experience of many of my friends who are doing family business in China, wages usually would not keep up with inflation because many companies or business owners would only review the necessity to raise the salary on a yearly basis and also because of the competition for jobs among the job seekers, many of these business men would refuse to raise the salary even though there has been a continual inflation in the society. This is actually the true description of many business in many developing economies in which the policy makers tend to encourage some degree of inflation. Another rationality of the preference for some degree of inflation by the business men is that inflation would mean possible continual price increase in the near future, and stimulated by this information, many customers and buyers would begin to buy more goods than they used to do. Because money saved in the banks could be devaluated as good prices increase, hence it is safer to have final good on hand rather than cash.

 

1.1.2            Problems: Some good prices may not increase to the same extent

 

As we have mentioned above, since inflation refers to an increase in the general level of prices, the price of every good and service need not increase. For example, if the inflation rate is 10 per cent, it means the on average the price are increasing by 10 per cent but the increase of the prices of some individual goods would probably vary. According to Christian Siegl (2009, p. 9) when inflation is underway some prices rise faster than other prices. Being in the unfortunate position to sell a product which price has not yet risen to the same degree than the prices of other products or commodities then the inflation would imply that the profit margin for the business men slims because monetary inflation will not affect all the prices to the same extent.

 

1.2    Job seekers

 

1.2.1            Opportunities: More employment chance for job seekers

 

 

Figure 1 The hypothetical Phillips Curve

Source: McEachern 2011, p. 385

 

For long policy makers are facing the trade off between inflation and unemployment. This view was suggested by the research of New Zealand economist A. W. Philips, who in 1958 published an article that examined the historical relation between inflation and unemployment in the United Kingdom. Based on the 100 years’ data, his data traced an inverse relationship between the unemployment rate and the rate of change in nominal wages (McEachern 2011, p. 384). The relationship is demonstrated in the so called Phillips Curve as illustrated in the figure above. The unemployment rate is measured along the horizontal axis and the inflation rate is measured along the vertical axis. As we can see, when the inflation rate moves up from 5% to 10%, because of the existence of the Phillips curve, the balance point is not moved from a to d, but actually it is moved from a to b which means that the unemployment rate is reduced from 10% to 5%. Though the actual date may vary, this framework reflects the negative relationship between inflation and unemployment rate. And in a factual perspective, because as we have mentioned, inflation at the beginning stage tend to favor the business sector with the delay of increase of labor cost and material cost, producers therefore would be encouraged to provide more production to enjoy such benefits and thus increased production would means increased employment.

 

1.2.2            Problem: Increased unemployment

 

But many economists believed that inflation would not fundamentally help with the unemployment issues. According to Ron Paul (2011, p. 156), for years it was believed that inflation stimulated economy and lowered unemployment rates, but in the later stages of inflation while its ill effects are perceived, and unemployment increases while real wages fall. And according to him, at these later stages, more inflation and wages controls to keep wages in a high level would make the unemployment problem significantly worse and only raise the unemployment rates.

 

1.3    For those who save a lot in banks

 

1.3.1            Problem: Reduced purchasing power

 

Inflation can have a destructive effect on savings. It has the heaviest impact on the less affluent part of the population. Inflation can reduce the purchasing power of their relatively small savings to a negligible amount, which could force them to lower their standard of living to pathetic levels (myfundi.co.za 2009).

 

1.3.2            Opportunity: Change saving into investment

 

A sample rationality offers those cash holders opportunity to turn the negative effects of inflation into positive effects. As we have mentioned, at the beginning stage usually inflation would benefit the producers of goods and the prices of which are about to raise, therefore, it is possible that the cash holders could investment these money into the productions of these popular goods. And obviously, the cash holders, in particular the smaller cash holders may not need to enter into the actual production activities which may not be quite possible as well because it takes time to establish a business, instead they could simply invest in the stocks of some popular industries and thus make use of the inflation.

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