Inflation and your Money: Negative Effects of Inflation

Two days ago, we had considered the definition of Inflation, its causes and how it is measured.

Today, we are going to focus on the Negative Effects of Inflation.

Inflation affects different people in different ways, with some benefiting from its effects at the expense of some who lose out.

The inflation rate also offers important clues about the state of an economy.

Most economists agree that moderate inflation is a sign of a growing economy and that deflation is a sign of stagnation.

Some of the most obvious negative effects of Inflation include the following:

1. When inflation is high, overall prices are rising within the economy. That makes it easier for businesses to justify price hikes.

2. Inflation can influence a company’s choice of accounting methods and distort Financial performance. It can negatively affect the budget and financial projections for the fiscal year. This, in turn, has an effect on the sales volume and profit margin.

3. For the individual, inflation affects the value of your securities and returns on Investment, especially Paper Investment (bonds, stock and mutual funds).

This is because the higher the Inflation goes, the higher the discount rate, making dividends and interest payment on an investor to worth less.

4. Perhaps the people worst hit by an Inflation are those on a Fixed Salary scheme eg. employees and those in the Civil service.

In Nigeria, the Government doesn’t tie wage adjustments to changes in CPI. That is why we are still at the N18,000 minimum wage now that the dollar is N365 as when the dollar was N199.

High inflation rates undermine the purchasing power of people on a fixed income, thus plunging more people into debt.

When inflation increases, purchasing power declines, and each unit of Currency can buy fewer goods and services leading to a decrease in the standard of living.

5. Finally, Inflation hurts SAVERS since the money saved will be worthless in the future.

Unless the money is saved in an account that pays an interest rate at or above the rate of inflation, the purchasing power of savings will erode. (Investopedia)

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Conversely, do you know that Inflation is NOT always bad?

Yes, while it redistributes purchasing power from those on fixed nominal incomes, it favours those with variable incomes whose earnings may better keep pace with the inflation.

I will expatiate more on this next as we deal on the Positive Effects of Inflation and how you can gain from it.

Any questions?

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