Negative Effects of Inflation on Low-Income People

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Inflation is the diminishing of purchasing power by consumers due to the rising costs of goods and services. Inflation simply means that a consumer's ability to purchase goods and services decreases as costs rise without a complementary rise in the consumer's income.


There are two types of inflation: monetary inflation and price inflation. Monetary inflation is a rise in the amount of money in the economy--the more money in the economy, the less value money holds. Price inflation is a rise of prices for goods and services.

Decrease in purchasing power

  • During an inflationary period, low-income people are the first in the economy to experience limits on purchasing power. Because the dollar is worth less in an inflationary cycle and low-income people are a part of a fixed-income group, their ability to purchase goods and services diminishes as prices rises.

    An example would be staples such as groceries. During inflationary cycles, low-income people are not able to make purchases they normally would. As a result, demand drops. Once demand drops, grocers, grocer suppliers, and farmers limit their production. Because there is less supply, the costs rise.

Limited employment opportunity

  • During inflationary cycles, companies faced with falling demand will limit production. The downturn in production leads to the need for few unskilled workers, and low-income people, typically not having an advanced education, are among the first of the workforce to feel the effects of inflation through their place of work.

Credit

  • Low-income people often turn to credit as a means of making necessary purchases they cannot afford as prices rise. Because of the exaggerated use of credit for purchases, low-income people become overextended on their credit and reach credit limits faster. What follows is an inability to make monthly payments, and as a result, fees are charged and interest rates rise.

References

  • Photo Credit eyeglasses and chart image by timur1970 from Fotolia.com
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