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When people pay higher amounts for everyday goods and services, the experts describe it as inflation. It is generally the sign of a nation’s struggling economy. While it is not a good economic situation since it is difficult to manage everyday expenses for the common man, some experts see it as an indication of a growing economy.
Moreover, the Covid-19 pandemic has made life really challenging for people all around the globe. Several nations have declared an economic crisis, and many are still struggling to sustain. While inflation has been surging for many years, this global pandemic has accelerated the process.
According to the report shared by the Bureau of Labor Statistics, US Department of Labor, the Consumer Price Index (CPI) for All Urban Customers increased by 7.5% as compared to the previous year.
Inflation can be good and bad; however, it all depends on the country’s economic condition. Inflation affects the nation’s economy - Want to know how? Continue reading the blog to find out the answer.
The Effects of Inflation on National Economy
Inflation impacts not only the national economy but also the global markets. In addition, inflation is a significant problem for developing or unstable countries and has impact on developed countries too. So, without much ado, let’s discuss the negative and positive impacts of inflation on the economy right here.
The Negative Effects
1. Effect on Bonds
Bonds are fixed-income assets for people that give a specific amount of profit per annum. So, when there is inflation, an individual will need to pay higher amounts for everyday goods while getting the same value for the assets.
The primary reason behind the rise in inflation is that people start selling their investments to negotiate with the higher goods and services prices.
2. Effect on Purchasing Power
People with monthly fixed incomes have more to spend and less to invest. When inflation rises, they experience a substantial fall in their purchasing power. This generally happens with people dependent on a fixed monthly salary or pension.
3. Effect on Desire to Save
When people notice the fall in the value of their hard-earned money, their desire to save starts to show a decline. Fewer people wish to save and invest when they know the value of money will decrease in the coming years. Therefore, lesser investments from people negatively impact the economy resulting in smaller capital accumulation.
The Positive Effects
1. Increased Profits to Sellers/Producers
The sellers or producers sell their goods and services at higher prices and earn maximum profits. Usually, this benefits the producers and not the customers. So, we can call it good for some and bad for others. Moreover, when the producers start getting increased profits, the production increases, which is also good for the overall economy. So, inflation can be profitable to boost production and sales.
2. Borrowers Pay Lesser Returns
The value of money decreases during inflation because there is a decline in the purchasing power of people. So, the borrowers return their money at lesser interest rates when compared to the borrowing rate.
So, these are some of the key impacts of inflation which we can keep in mind as we decide on our stock picks during this period of high inflation.
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