The Significance of Inflation
- The impact of inflation on an economy will depend on
- The rate of inflation
- The cause of the inflation
- Whether it is fluctuating
- Whether it was correctly anticipated
- Its rate relative to that of other countries.
- A low rate of inflation is unlikely to cause significant problems for an economy
- A low rate of demand-pull inflation may bring benefits for an economy, as firms will be encouraged to increase output
- Cost-push inflation, however, can be more harmful, as it is likely to be accompanied by a fall in real GDP and a rise in unemployment
- A high rate of inflation is likely to cause a number of problems for an economy
- With the higher rate of inflation comes higher menu, shoeleather and administrative costs, along with greater inflationary noise.
- Firms will therefore have to spend a large amount of time managing their money
- This involves an opportunity cost, as this time could be used on planning new products.
- With rapid price rises, it becomes difficult to judge what are the best buys, and people may be less prepared to accept money in payment and will resort to bartering.
- Fluctuating inflation creates inflationary noise, and makes it difficult for the government, firms and households to plan ahead.
- A big factor on whether the rate of inflation is damaging to an economy is the rate of inflation relative to other economies
- If a country has a rate of inflation lower than the countries it trades with, then its products will become more internationally competitive, and its current account position is likely to improve.
- Inflation can affect people differently, depending on their spending patterns.