Effects of Inflation

Subject: Economics
Type: Informative Essay
Pages: 3
Word count: 837
Topics: Finance, Macroeconomics, Microeconomics
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Inflation

In the face of the Covid-19 pandemic and war in Russia-Ukraine, the media has used the term inflation frequently to make sense of these difficult times. Despite the people’s familiarity with the term, few understand it. According to Oner (2022), inflation is the rate at which the cost of living in a particular country over time increases. Individuals feel the pain of inflation when purchasing products and services at a higher price point than in earlier years. Oner (2022) adds that inflation results from local currencies losing their purchasing power and disruptions in supply and demand in a particular country. When different conditions cause the purchasing power of money to fall, the price of commodities and services is bound to increase. Additionally, when the supply side is disrupted by natural disasters and the cost of production rises, the price of goods also increases (Oner, 2022). Similarly, disruptions in demand mainly caused by government economic policies may render the supply side incapable of meeting consumer demands, causing the price of products and services to rise. These changes in the prices of commodities and services are then transferred through international trade, causing global inflation. Therefore, through international trade, the effects of inflation are evident in local and global economies with both positive and negative implications.

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Effects of Inflation on Local Economies

The effects of inflation can be classified into positive and negative effects. First, on the opposing end, local currencies lose their value. According to Oner (2022), when inflation is high, the value of a currency is examined over a prolonged period, and a decline in value is expected. As the money loses value, consumer purchasing power reduces, negatively affecting local trade. Second, inflation amplifies a country’s economy’s rich and poor gap (Adkins et al., 2019). In the face of inflation, wealthy individuals become wealthier as the value of their assets increases, and the poor become poorer and unable to afford their basic needs. An increase in the price of essential goods renders individuals with low incomes incapable of thriving in the country’s economy. Lastly, inflation increases the cost of living in the affected country. Higher taxes also accompany an increase in commodity and service prices. Individuals’ expenses thus increase with little to no increase in wages.

Despite the negative impacts of inflation, it may also lead to positive effects. First, as inflation increases, investment and spending rates increase. During inflation, the risk of local currencies continuously losing value compels individuals to invest their money in highly productive areas of the economy. Such a shift benefits a country because some areas of the economy receive a boost. Lastly, inflation increases asset prices in the affected country, favoring the high-income class. Therefore, as individuals seek to invest in illiquid assets to shield themselves from inflation’s effects, the value of assets increases.

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Effects of Inflation on Global Economies

Global inflation causes ripple effects that negatively affect developing countries far more than developed ones. Inflation worldwide causes disruptions in international trade due to increased import prices (Oner, 2022). Although the interconnectedness of global supply chains boosts trade between countries, it also means that the prices of products and services are affected throughout the system. As the costs of commodities increase, inflation drives further inflation in importing countries (Oner, 2022). Additionally, increasing global inflation levels translates to a rise in global debt. According to Ahmed et al. (2021), the effects of the Covid-19 pandemic that introduced a rise in global inflation are significantly associated with increased global debt. As governments seek alternatives to meet their financial needs that the usual tax structure can no longer meet due to inflation, indebtedness is inevitable. With more expensive imports of commodities in the face of inflation, countries, regardless of their economic status, are compelled to accumulate debt (Gómez-Puig et al., 2022). With multiple economies affected, the global debt level also increases.

In conclusion, as international trade amplifies in the modern day, inflation will continue to affect individual and global economies. The price of commodities and services is bound to increase as local currencies lose their purchasing power. Additionally, any supply disruptions, such as natural disasters, public health emergencies, and the Russia-Ukraine war, increase the cost of production, ultimately causing inflation. Disruptions in demand caused by a shift in government policies can also push inflation levels higher, as commodities prices increase due to scarcity and greater consumer purchasing power. These factors can induce and stimulate inflation in specific countries and globally. The effects of inflation are thus felt in local and global economies. In local economies, inflation lowers consumers’ purchasing power, aggravates income inequalities, and the cost of living increases for its residents. The effects are firmly linked to the decline in local currency’s value, higher taxes, and an increase in the price of commodities. Despite the adverse effects of inflation, it increases investment and asset prices in the affected countries, boosting specific areas of the economy. At a global level, changes in international trade translate into increased global debt and inflation levels in countries with developing nations adversely affected compared to high-income countries.

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  1. Adkins, L., Cooper, M., & Konings, M. (2019). Class in the 21st century: Asset inflation and the new logic of inequality. Environment and Planning A: Economy and Space53(3), 0308518X1987367. https://doi.org/10.1177/0308518×19873673
  2. Ahmed, R., Aizenman, J., & Jinjarak, Y. (2021). Inflation and Exchange Rate Targeting Challenges Under Fiscal Dominance. Journal of Macroeconomics67, 103281. https://doi.org/10.1016/j.jmacro.2020.103281
  3. Oner, C. (2022). Inflation: Prices on the Rise. International Monetary Fund. https://www.imf.org/external/pubs/ft/fandd/basics/30-inflation.htm
  4. Gómez-Puig, M., Sosvilla-Rivero, S., & Martínez-Zarzoso, I. (2022). On the heterogeneous link between public debt and economic growth. Journal of International Financial Markets, Institutions and Money77, 101528. https://doi.org/10.1016/j.intfin.2022.101528
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