General, Investment, Tax Savers

Inflation and its Impact on Earning


Before we go in-depth on learning about the topic, it is imperative to understand the meaning of inflation. Technically, inflation may be defined as a continuous increase in the general prices of goods and services over a period of time in an economy. In lay man terms, for every rupee of money held, the ability to buy the same goods as before falls. This illustrates the inverse relation of purchasing power of money and inflation. Inflation is measured across various parameters among which one that is widely used and most relevant to our understanding is the Consumer Price Index (CPI).

An individual who has fixed level of income is at the most disadvantageous position during inflation. He is in receipt of the same amount, i.e. his earnings as before inflation, although now he will be able to purchase lesser goods or avail lesser services compared to before. This implies there will be a decrease in consumption by individuals falling under this category that will lead to a fall in their standard of living and hence a deteriorated quality of life.
Such individuals might resort to borrowing to maintain the same level of expenditure. But in that case the additional borrowing costs and subsequent increase of the same during inflation will only add to their woes.

The individuals affected the most would be fixed salaried employee with no adjustment to earnings with respect to inflation. Also, investors with fixed return sources like bonds or debentures will be at a notional loss. Persons falling below the poverty line, retired pensioners receiving a constant amount as pension and annuitants are adversely affected during inflation due to the same reason.

In such a scenario, if there is an increase in the level of earnings equal to or more than the rate of inflation in the economy, the individual benefits. He is at least able to maintain the same standard of living as before inflation. The Dearness Allowances offered to the salaried class is a classic instance of maintaining the standard of living and thus the quality of life of the employees. Dearness Allowance (DA) is additional payment made to workers which is adjusted against the Consumer Price Index (information is released by the government on monthly basis). It also offers additional benefits of economic stability and moral boost.

Inflation does not always have negative impact on earnings. Its nature varies across different sections of individuals in the economy. Explained above was one such section of salaried employees, annuitants etc who get negatively affected due to inflation. In another case, for instance that of an asset holder, inflation is likely to have a positive impact on his earnings.

If an individual holds an asset and is in receipt of income from the same, he is likely to benefit. For example, a landlord owning a building and receives rent from tenants. During inflation, he can increase the rent receivable (his earnings) amid increase in general price levels.

As regard to control measures, both the government and the central bank undertake various fiscal and monetary policies, respectively to counter the inefficiencies caused in an economy due to inflation.



CA Rachit Jain

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