Effects of Inflation

Inflation does not affect everyone in an economy equally — it redistributes real income and wealth even when nominal incomes are unchanged, which is why its effects are best studied section-by-section.

• Fixed-income earners (salaried employees, pensioners, those on a fixed wage or fixed rent) are hurt the most — their money income stays the same while prices rise, so their real income and standard of living fall.
• Debtors and creditors — debtors gain, because they repay a fixed sum of money that is now worth less in real (purchasing-power) terms than when they borrowed it; creditors lose for the identical reason, since the money they receive back buys less than what they lent.
• Savers lose, because the real value of money held in savings accounts or fixed deposits erodes over time; this discourages financial saving and can push people toward real assets (gold, land, property) instead.
• Producers and businessmen typically gain, at least in the short run, because selling prices usually rise faster than costs, widening profit margins; this can also encourage speculative activity (buying now to resell later at a higher price) rather than genuine production.
• Income distribution tends to worsen — wage/salary earners, pensioners and creditors (often the less well-off or fixed-income sections) lose real purchasing power, while asset-owning producers and debtors gain, widening economic inequality.
• Economic growth can be helped by very mild inflation (it can encourage investment, since holding money becomes relatively less attractive than holding productive assets), but galloping inflation or hyperinflation destroys confidence in money, discourages saving and long-term investment because of uncertainty, and distorts how resources are allocated across the economy — on balance a serious net negative for growth.
• Foreign trade and the balance of payments — rising domestic prices make a country's exports costlier and less competitive in world markets, while imports may look relatively cheaper, tending to worsen the balance of trade. …