Inflation tax
Topic: Inflation and Index Numbers: CPI, WPI, IIP and the Deflator · NCERT: Beyond NCERT
Meaning
The inflation tax is the hidden loss of purchasing power (what money can buy) suffered by people who hold money and fixed-income assets. It happens when the government pays for its spending by creating new money. The extra money raises prices, so each rupee buys less. No law imposes it, but it works like a tax, moving resources from money holders to the government. Its burden falls heavily on the poor, who have few assets that are protected from inflation.
Example
Suppose the government pays for a deficit by printing money and prices rise. A family keeping its savings in cash, or a pensioner on a fixed pension without Dearness Relief, can now buy less with the same rupees. The government, which is a large borrower, repays its debts in cheaper rupees.