During inflation, who suffers the most?
-
- Wage and salary earners
- Creditors
- Debtors
- Businessman
Correct Answer: Wage and salary earners
Answer Explanation
Wage and salary earners tend to suffer the most from inflation due to the erosion of their purchasing power. Inflation refers to the sustained increase in the general price level of goods and services in an economy over time. When inflation occurs, the cost of living increases, and the value of money decreases. Inflation affects different segments of the population differently, but wage and salary earners are particularly at risk.
With an increase in the price of goods and services, money’s purchasing power decreases, meaning that the same amount of money can only buy fewer goods and services. For wage and salary earners, this results in a decrease in their real incomes. Regardless of whether their nominal wages increase or decrease, their purchasing power is eroded if inflation outpaces their wage growth.
As a result, their standard of living can decline, making it harder to afford food, housing, and healthcare.
Imagine a situation where a wage earner’s salary remains constant while inflation is at 5%. In other words, the price of goods and services will increase by 5%. If the individual’s salary does not increase by at least 5%, then it will become increasingly difficult for them to maintain the same level of consumption. Those with fixed incomes, especially those earning wage and salary, may experience financial stress and hardship as a result.
Furthermore, inflation can have an uneven impact on different goods and services. Food, healthcare, and education are often subject to higher inflation rates than other goods. Inflation can have a disproportionate impact on wage and salary earners’ expenses due to the significant portion of wage and salary earners’ budgets made up of these items.
Why the other options are not correct
b. Creditors:
During inflation, the real value of money decreases, which means the purchasing power of the money lent decreases as well. Creditors are individuals or entities that lend money to borrowers. Inflation premiums are typically included in interest rates charged by creditors to protect them from its negative effects. Thus, they adjust the interest rate on loans based on the expected inflation rate.
Consequently, while inflation may reduce the real value of the money they receive, the interest they earn helps compensate for this loss, making them less susceptible to inflation.
c. Debtors:
As opposed to creditors, debtors can actually benefit from inflation, especially if they hold fixed-rate loans. Debtors owe money to creditors. Inflation erodes the real value of money, which means that the relative burden of debt decreases as time passes. Using money that is worth less in real terms as prices rise, debtors find it easier to repay their loans.
A long-term fixed-rate loan’s repayment amount remains constant even as inflation reduces the real value of money.
d. Businessman:
Based on their industry and the specific circumstances, businesses may experience both positive and negative effects of inflation. The cost of production may increase for some businesses due to increased input prices, but some may be able to pass on these higher costs to consumers. It may be easier for businesses to mitigate inflation’s negative impact if prices can be adjusted in response to it. Furthermore, businesses that own tangible assets like real estate may benefit from rising asset values during inflationary times.
Conclusion
The erosion of purchasing power during inflation affects wage and salary earners the most. A decline in their standard of living occurs when their purchasing power declines as the cost of goods and services rises. Inflation affects other groups differently, such as creditors, debtors, and businessmen, but wage and salary earners are particularly vulnerable to its adverse effects.
These dynamics help illuminate inflation’s impact on various segments of the population and emphasize the need to implement measures to mitigate its potentially harmful effects.
Inflation in a developed country usually sets in
I am Bibisha Shiwakoti a final year BBS student from Janapremi College. I have completed my higher secondary education at Kalinchowk Secondary School.
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