Inflation: What It Does To People

Whenever one thinks about inflation, the picture of a monster gets projected in one’s mind. Is inflation a demon that simply

gulps down the value of our money? How mean is inflation? So what does inflation really do to people?

Most people live double lives. One is as a producer of goods or services and the other is as a consumer of goods and

services. When people go to work and earn a salary, they play the role of producers but the moment they step into their

homes they become consumers. The irony is that both these roles are contrary to each other. For example, if one is

working in a car manufacturing company, when the demand for cars goes up, the company may raise the prices and its

profitability could rise accordingly. When profitability goes up, an individual’s salary could also move in the same

direction. With a good increment and bonus, aspirations may go up and one starts aspiring to have his or her own car.

When a person goes to purchase a car, he or she realizes that the prices have gone up. But since the person may have just

got a raise and a bonus, one still decides to buy the car at the higher cost. So between paying a lower price for the car and

getting no increment or paying a higher price for the car and receiving an increment and bonus, the individual may prefer

the latter.

This may show that a little bit of inflation may create a positive mindset. When

companies do well, they execute growth plans, try to create more jobs, try to pay

higher salaries, and try to look after t h e i r e m p l o y e e s b e t t e r. A n

environment of optimism is created and the propensity for people to raise

their living standards by purchasing more goods and services. In this way

the economy may prosper. Therefore a controlled inflation might be a

growth booster for the economy. The problem arises when inflation level

goes up steeply. At such times people may not want to sit on cash as its value

erodes. While people want to borrow money, institutions may not want to lend

money as it becomes difficult for lenders to ascertain the interest rate at which it

makes economic sense for them to lend. If they lend at an interest rate which will lag the

expected inflation, their proposition may become self defeating. Hence they may raise the interest

rate, which can tighten the liquidity in the system, which in turn can reduce investment and consumption and slow the

economy. Also, it is a misconception that the poor are big losers in an inflationary environment.

According to an article in the economic times by T T Ram Mohan, a professor from IIM Ahmedabad - the RBI’s latest

macro-economic review finds that wages of rural workers may possibly have kept ahead of the relevant inflation rate.

Wages of organized workers too could have kept ahead of inflation. Government employees are taken care of by

adjustments to dearness allowances. Government employees are less protected but there is impressionistic evidence that

daily wages could have risen sharply. One must also observe that the Government’s focus on rural employment has tried

to help rural folks to be paid in keeping with inflationary pressures. According to T T Ram Mohan, these are the reasons

why people may not see a large amount of street protests on price rise. Hence, the bigger imperative for the country could

be to induce economic growth by shedding interest rates. Unless the economy grows amid moderate inflation, the nation

might not create enough wealth to pay for the cost that inflation brings with it.

Disclaimer: The views expressed above are for information purpose only and do not construe to be any investment, legal or taxation

advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Mutual Fund will

not be liable in any manner for the consequences of such action taken by you. Please consult your financial/Investment advisor

before investing.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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