Inflation affects the economy’s growth in different ways by reducing the value of the amount of money available for spending. Inflation is defined as a sudden increase in the cost of ordinary goods and services over a certain time frame. The change in commodities prices is used to determine the growth of an economy and indicates the direction of a country’s economy. Inflation affects every sector of the economy because it influences the worth of money individuals have. Cost-push inflation and demand-pull inflation are some of the categories of inflation standards in society today. A change in prices of products and services due to an alteration in the costs for factors of production is cost-push inflation. Conversely, demand-pull inflation is the change of commodities’ prices that relates to a change in the demand in the market. In cost-push inflation, when the cost of production significantly increases, commodities prices go high due to a reduced supply of products. The cost-push inflation affects the aggregate demand and aggregate supply curves in the market.
Cost-push inflation emerges when the price for factors of production increases due to demand for more by providers. For instance, when wages and salaries rise, the cost of labor, which is a factor of production, increases. In reaction to increases in manufacturing costs, businesses raise the pricing of their products in order to sustain profitability. Another driver of inflationary pressures is the development of natural catastrophes such as floods, droughts, and others, which result in a decline in market production elements such as raw materials. Determined by the size of the change in manufacturing costs, the aggregate supply curve swings to the left. The curve swings to the left as the cost of manufacturing rises, reducing the quantity of output available for display. For example, an increase in the raw materials’ pricing causes manufacturers to produce less. Whenever the values of productive resources rise, the aggregate supply curve changes to the left as there is less availability of the items on the market due to reduced output. Below is a graphical presentation of the impact of cost-push inflation.
Effects of Cost-push Inflation on the Working Poor
All groups of people in society are affected by the increase in inflation rate. For those people who are working but still poor, inflation affects them by reducing the amount available for spending. The increase in volume prices affects the population’s capacity to afford commodities (Cavallo, 2020). A family with a constant income faces challenging economic times because they can only purchase fewer goods than they could before. High prices require more of the available amount for spending from the customer. In most cases, inflation impacts the consumer’s purchasing power resulting in lower demand in the long run. Cost-push inflation results in a reduction of consumption since the money can only purchase less of what is available. As a result of inflation, the poverty level increases as people can hardly maintain their lifestyles.
Additionally, inflation affects the saving culture of the working poor. Consumers use the entire amount of income purchasing goods and services to maintain their lifestyles. Inflation discourages the saving habit because people know that their money will come back at a lower value than it had during the saving period. As a result, individuals want to spend more. The working poor expend their income to purchase the basic stuff and utilize all of their earnings, leaving none for savings. Generally, inflation negatively influences the lifestyles of the working poor by reducing their extent of consumption and discouraging their saving culture.
Government’s Role in Inflation Control
There are various methods the government can use to control inflation rates in the country. One, it can install a minimum wage and salary for every employee in all sectors. By placing the wage and salary control methods, the government ensures that every worker can cope with the prevailing rates of inflation. The employees are guaranteed a specific amount of income which they use to maintain their lifestyles. Society can also offer the production companies subsidies to ease the cost of production. Subsidies regulate the manufacturer’s spending on factors of production, maintaining the prices at low rates. Contributions facilitate a consistent supply of commodities in the market, retaining low prices in the end. With the low prices in place, the working poor can purchase the desired products at the current and demanded quantity.
In addition, the government can reduce the number of reserve requirements in the banks. The reserve requirements are the threshold amounts that the government requires the banks to hold. When the reserve requirement is low, it encourages borrowing from the consumers since the interest rates for loans are meagre. When the amount required for reserves is high, the number of borrowers is low because, inversely, the interest rates are high (Chugunov et al., 2021). Rising interest rates restrict consumer lending, resulting in a limited supply of currency in circulation. Whenever the administration wishes to keep inflation under control, it mandates a drop in the reserve ratio, promoting people to borrow to preserve their standard of living. The government may also reset the interest rates charged to borrowers by the banks and other crediting facilities. Reducing the interest rates in the market brings in more borrowers to the market. Inflation is an essential aggregate that economists use to monitor the economic trends in society.
Cavallo, A. (2020). Inflation with COVID consumption baskets (No. w27352). National Bureau of Economic Research. Web.
Chugunov, I., Pasichnyi, M., Koroviy, V., Kaneva, T., & Nikitishin, A. (2021). Fiscal and monetary policy of economic development. European Journal of Sustainable Development, 10(1), 42-42. Web.