The Effects of Inflation on Consumers and Industry Players That
Infotipsnews.com - The Effects of Inflation on Consumers and Industry Players That Are Important to Learn. Inflation is not a ne 6 minutes read
Infotipsnews.com - The Effects of Inflation on Consumers and Industry Players That Are Important to Learn. Inflation is not a new phenomenon in economics and business fields. In fact, inflation has been studied for many years. Within reasonable limits, inflation is believed to increase economic activities. However, too much of it will destroy those activities. So what exactly is inflation and how is the impact for the economy?
Inflation is an increase in the price of goods or services continuously within a certain period of time. The effects of inflation on consumers can be divided into two effects, namely positive and negative effects. In general, an increase of inflation can reduce the purchasing power of consumers. But it really draws attention to their income level.
Consumers who have high incomes will not be too worried about rising inflation. Conversely, consumers with low incomes will feel on the edge because the money they have is not enough to buy their basic needs.
Positive Impacts of Inflation for Consumers
Some of you may be wondering, is inflation good or bad? The answer, of course, depends on the inflation rate.
As mentioned above, inflation has both positive and negative impacts. Here are some of the positive effects of inflation that you need to learn:
1. Increase Expenditure and Investment
When inflation increases, consumers will have the potential to advance purchasing decisions. Usually, they will worry if in the future the price of a product will become more expensive. This inflation effect on consumers makes them think rationally to buy now rather than pay more later.
In addition, consumers are also encouraged to be able to find the best return on investment. When money starts to lose value, people are faced with two choices. First, let inflation lower the value of their money. Or, secondly, try to find investments with more promising returns.
2. Asset Prices Rise
Historically, asset prices seem to be rising faster than inflation. In the 1980s, the price of a home sold in the US was about $74,5000. Which if adjusted for inflation would have a value of $231,000 in 2019. Whereas in 2019, the average house sold for around $375,000.
That means, over a period of 39 years, the real profit earned is approximately $144,000. Therefore, when inflation occurs, people will tend to move capital to illiquid assets such as bonds, stocks, and real estate.
3. Reducing the Effective Debt Level
A high inflation rate will actually benefit people or institutions that have high debt levels. For example, suppose a borrower charges 3% interest on a loan. If inflation is at 10%, then people's income will increase so that the effective level of debt that must be paid will decrease.
Despite being a positive impact of inflation for those in debt, the increase in inflation actually causes huge losses to savers and institutions such as banks. Because the bank will receive a lower interest rate than the inflation rate. Meanwhile, savers will also earn interest below the inflation rate.
4. Inflation is Always Better Than Deflation
Up to now, there are still many economists who debate the most optimal inflation rate, is it 1 percent, 2 percent, 4 percent, or even more? However, regardless of the level, the effect of inflation on consumers will always be better than deflation. The reason is that deflation is considered more dangerous to the economy than inflation.
Deflation has the potential to increase the debt burden, both for the government and individuals. In other words, deflation can cripple public services and effectively create bankruptcy. This is because a company cannot meet the rapidly increasing payments.
Negative Impacts of Inflation on Consumers
After knowing the positive impact of inflation, you need to know the negative impacts as well. By knowing both sides of Inflation impacts, you will know better how to deal with inflation later.
First, we can criticize the negative impacts of this phenomenon on business fields. The following are some of the negative effects of inflation on business:
1. Money Loss Value
When a product experiences an increase in price, the money will lose its value. For example, if you keep Rp. 10,000 in a piggy bank for 10 years, the things that can be bought with that money will not be as much as 10 years ago.
This has been evident because the value of the US dollar has lost more than half of its value between 1980 and 2019. In other words, you can only buy half of an item that was worth the same 30 years ago.
Inflation will encourage consumers to seek a return on capital due to the loss of purchasing power. So they no longer think of saving money in a piggy bank, under the mattress, or a low-interest bank. They will choose a better way of return, such as investment.
2. Inequality Occurrence
Inflation will harm households with relatively low incomes. One of the most visible effects of inflation for consumers is rising asset prices. An increase in prices will make their income run out faster. So they tend not to have the opportunity to buy stocks, housing, or other commodities.
3. Exchange Rate Fluctuations
When the money supply increases, the currency of a country can decline more quickly. As a result, foreign exchange rates must also adjust to new realities. Meanwhile, if the exchange rate declines, then economic relations between countries also have the potential to experience a decline.
4. Rising Cost of Living
When the price of goods increases, consumers must prepare themselves to pay more to buy basic necessities and luxury goods. Actually, this is not a problem if income also increases. But if the price of goods rises and income is fixed, then their chances of having money left over are of course also getting smaller.
Impacts of Inflation for Various Industry Categories
The impact of inflation on economic growth must be addressed wisely so that we do not lose the opportunity to invest. However, it should be noted that inflation does not only affect consumers, but also industrial players. So, apart from knowing the effect of inflation on consumers, you also need to know the impact of inflation on some of these industries:
● Retail and E-Commerce
If inflation occurs, consumers will reduce spending to buy selected goods such as clothing or electronics. They will tend to switch to other cheaper brands. For the retail and e-commerce industries that provide selected goods, of course this is a problem that is quite confusing.
● Cosmetics and Personal Care
Customer loyalty of beauty products will be tested when prices increase. However, if it continues to rise, the customers will also be overwhelmed. So the cosmetic and care industry must deal with this by frequently offering discounts or shipping cost savings.
One of the effects of inflation on consumers is the increase in travel costs. This is due to operational costs for the travel industry. As a result, the travel industry could experience a significant decline in enthusiasts.
● Food and Drink
In the last few months, the price of food and drinks has indeed increased quite a bit. This is certainly a challenging situation, especially if the food and beverage initially has many customers. People will certainly prefer other foods and drinks that are cheaper but still filling.
So, those are some of the effects of inflation on consumers and industry players. As we can see, this phenomenon offers both positive and negative impacts. We as a consumer, should prepare ourselves by targeting a simple lifestyle, and using our money wisely. This can reduce the worriedness of facing inflation in the future. Do you think the discussions above help you?