for beating inflation i think we must know the common factors which effects inflation because moderate inflation can cause problems because it lessens the practical advantages of using money instead of having to trade. This can be better understood if you look at the four functions that economists generally attribute to money and the way that inflation affects them:
- Money is a storage of value. If you were to sell a horse for 10 gold coins, you should be able to go back and change that money in for another horse tomorrow or the next week or the next month. When money holds its value, you feel safe saving it, and instead of selling a horse, you might be in situation in which you sell real estate or any other asset.
- Inflation weakens the function of money as a storage of value, because each unit of money is worth less with the passing of time.
- Money is a standard unit of account. If you are interested in buying a sheep, you will probably not want to take the sheep as a loan with the commitment of paying off two sheep the next year. Most likely you will get a loan and pay it in monetary terms. In other words, get a loan of one gold coin to buy your sheep, with the commitment of paying two gold coins next year.
- The progressive loss of the value of money during a period of inflation makes the borrowers to be less willing to use the money as standard differed payments. Suppose that a friend asks you to loan him Rs.100, and commits to paying you Rs.120 within a year. This seems like a good deal – after all this is an interest weigh of twenty percent. But if the prices are increasing rapidly and the value of money is decreasing, how much will you be able to buy with those Rs.120?
- Inflation makes people be less willing to loan out money. They fear that once the loans are paid off, the money they receive will not have the same buying value then the money loaned. This uncertainty can cause a devastating effect over the development of new businesses, that to finance their businesses are based a good amount on loans.
- Money is a means of exchange. Money is a means of exchange between buyers and sellers because it can be directly changed for anything else, which makes buying and selling a lot easier. In an economy of trade, an apple producer that wants to buy chocolate might see himself first forced to buy oranges and then exchange the oranges for the chocolate, because it is possible that the chocolate salesperson only wants oranges. Money however, eliminates this type of problem.
- But if inflation is high enough, money is no longer an effective means of exchange. During hyperinflations, frequently the economies go back to trading and this way, the buyers and sellers do not have to worry for the loss of the value of money. For example, in a healthy economy the apples sales man can sell them for money and then change this money in for chocolate. But during hyperinflation, while he is selling the apples for money and buys the chocolate, the price of the chocolate could have increased so much that he is not longer able to buy chocolate. During a hyperinflation, the economies have to go to tricky trades.
Another result of inflation is that it produces a similar effect to a significant increase of taxes. This may seem strange, because we normally consider the government charge taxes taking part of the people’s money from them, no by printing more money. But a tax is basically anything that transfers private property to the government. The alternation of the money or printing of more money can have this effect.
Suppose that the government wants to buy a new van that is going to cost Rs.20,000 for the national library. The right way to do this would be to use Rs.20,000 from the income taxes to buy it. A sneaky way of doing it would be to print up the Rs.20,000 of new money. By printing and spending new money, the government has turned $20,000 of private property, which in this case is the van, into public property. So this means that printing new money works exactly like a tax. Since printing new money generates inflation, this type of tax is generally known as an inflationary tax.
An inflationary tax is not only sneaky, but also unjustly affects the poor because they spend almost all of their income on goods and services that go up considerable during inflation. In comparison, since the rich are able to save a high proportion of their income instead of spending almost everything they receive, an inflationary tax affects them proportionately less. The rich can protect themselves from a great part of the damage caused by inflation by inverting their savings into assets, such as root property, whose prices increase during inflation.