Author: Lambert Zheng
Editors: Simran Gohel and Anand Soma
Artist: Christie Peng
To what extent will inflation affect consumers’ lives and how will it change relate to government intervention?
Inflation is defined as a sustained increase in the general price level of goods and services in an economy over a period of time. It will affect the real value of currency within the marketplace and thus will influence inflation on the consumer side of the economy. Therefore, inflation will affect the choices of consumers to a large extent.
Inflation is caused either by high aggregate demand or low aggregate supply, called “demand-pull” inflation” and “cost-push” inflation. In addition to the two causes of inflation, there are three types of inflation. The first one is creeping inflation, which indicates a low rate of increase in general prices (within 10 percent) and is not a problem for the economy. The second is hyperinflation, which refers to an exceptionally high rate of inflation and may result in people losing confidence in the currency (over 50 percent). The last type is accelerating inflation, which indicates a situation where the rate of inflation is rising and is beginning to become a severe problem in an economy (from 11 to 49 percent). We will discuss these three kinds of inflation, respectively, in the following paragraphs.
In a short-run scale, creeping inflation will not cause any economic problems to economics as the rise in price is relatively low; consumers will not be willing to change their habits or choices because they have loyalty for a specific brand or they feel it will be too troublesome to change from one product to its substitution. The government is supposed to do nothing to regulate the general price of goods and services because no crucial problems will arise as a result of creeping inflation.
However, if we look at the long-run scale of creeping inflation, it will help the economy by increasing its GDP. For instance, in 2018, the inflation rate in China was 2.2 percent, and the CPI was 2.4 percent, indicating creeping inflation. This had led to a 6.6 percent increase in the GDP. It showed that the GDP could benefit from the rise. According to ceteris paribus, when creeping inflation occurs, the real value of currency decreases. As a result, exports will be more competitive as the actual value of the product exported will be cheaper than before; imports will become more expensive, so there will be less import flow in the economy. This causes the GDP to go up. As the GDP floats higher, consumer confidence increases, ND people are more willing to purchase instead of saving money in the bank. In other words, consumers’ habits have been changed; they would like to buy more products. The supply responds to the increased demand of consumers, and more jobs are created. Finally, the economy will experience a period of economic growth, which will lead to a climbing tendency in consumers’ income and purchasing power: they are willing to pay more in luxury goods—their choices have been changed. Nevertheless, more purchasing power means more aggregate demand. Governments should be cautious to avoid demand-pull inflation by using contractionary fiscal policy to impose higher taxes on some specific goods to ensure demand does not exceed supply and try to find a balance between economics, growth, and inflation.
In brief, creeping inflation does not affect the choices of consumers on a short-run scale. However, consumers’ decisions may be influenced by this inflation over a relatively long period. The creeping inflation does change consumers’ decisions to a large extent because in realistic cases, most governments would like to have creeping inflation to boost their economics; thus, the majority of the consumers in the world will live in such conditions and be influenced by the inflation in a long period.
When prices are out of control, hyperinflation develops. One of the most famous examples of hyperinflation happened after World War in Ruhr, Germany, because of the harsh reparations Germany had to pay for the war. The inflation caused millions of people to suffer from starvation and severe cold in winter. It undoubtedly led to social chaos and instability, driving people’s dissatisfaction until it peaked in 1923. Unlike creeping inflation, hyperinflation is always caused by the government’s intervention in the economy and every
country tries to avoid this harmful act; in this case, the government printed too much money to pay for reparations which resulted in rocketing price levels. According to Maslow’s hierarchy of needs, people in Ruhr at the time could only pursue the physiological needs; their choices and habits had completely changed. For instance, the wealthy middle class found that their savings which could have bought a house in 1921, by 1923 would not even buy a loaf of bread. Pensioners still received the same pension as before, and the government lost the ability to provide them with more money. Unfortunately, famine killed many.
In previous cases, we could see how destructive hyperinflation can be. In theory, according to ceteris paribus, hyperinflation would cause a decrease in confidence as the price of goods continues to climb. Consumers’ purchasing power would tend to shrink; they purchase fewer products, and those products are always the basic need for human beings. As hyperinflation continues, workers may require higher wages from their boss, which means the cost of supply will also increase, leading to cost-push inflation—the situation becomes worse. A new consumer habit will also develop—hoarding. Start with durable goods like washing machines, televisions: consumers spend all of their life savings to buy things, afraid that the price will rise again. If inflation becomes more severe, consumers will hoard perishable goods like eggs and vegetables to meet their physiological needs. In this case, hyperinflation was caused by the excessive printing of money. The primary method to cope with this problem is to stop printing money and slow down the depreciation of currency. It will at least prevent inflation from becoming more severe.
In an economy, everyone can be a potential consumer, no matter what kind of occupation they hold. We will discuss the effects of hyperinflation on different types of people’s lives.
During inflation, employers may consider giving out the wages daily instead of weekly, as the rate of inflation changes every day. It will make their companies unstable, and they would find it harder to regulate their budget. The cost of the raw materials would also arise while a company’s sales are decreasing each day, driving the company to bankruptcy. Borrowers will find themselves benefitting from hyperinflation as the real value of what they have borrowed decreases. Due to this, they will be more likely to refund the money; Lenders, however, will be worse off, as the loans they gave out become worthless during hyperinflation. Those who receive pensions, as discussed before, will find it difficult to buy anything if the government fails to pay a higher allowance for them.
In conclusion, the lives of consumers are significantly influenced by hyperinflation. They tend to buy those goods which only satisfy their physiological needs and try to hoard goods in their homes. Some may argue that “hyperinflation is hard to develop during peacetime because none of the governments print a lot of money. We should argue this statement under a modern concept. As a result, hyperinflation will not impact consumers’ choices and habits nowadays to a large extent.” During peacetime, it is hard for hyperinflation to develop and cause any harm to consumers. However, in theory, it will cause severe changes in consumers’ habits and choices, as the case above has illustrated. It cannot ensure that there will be no hyperinflation in the future. Still, these are the experiences of our ancestors, and we should consider the potential effect it will have on future generations.
Citations:
Macrotrends. China Inflation Rate 1987-2020. 2020,
www.macrotrends.net/countries/CHN/china/inflation-rate-cpi.
Wikipedia. Hyperinflation in the Weimar Republic. 1 Sept. 2020,
en.m.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic.
Wikipedia. Inflation. 13 Sept. 2020, en.m.wikipedia.org/wiki/Inflation.