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Costs of Inflation
Low inflation is the main macro economic goal for most western countries.
There are many economic costs of high inflation
- Cost of reducing inflation:
High inflation is deemed unacceptable therefore governments ts feel it is best to reduce it. This will involve higher interest rates, the reduction in AD will lead to a decline in economic growth and unemployment
- International competitiveness:
Higher prices will make British goods less competitive, leading to a fall in exports. However this may be offset by a decline in the exchange rate.
- Confusion and Uncertainty:
When inflation is high people are uncertain what to spend their money On. Also when inflation is high firms may be less willing to invest because they are uncertain about future profits.
- Menu Costs.
This is the cost of changing price lists
- Shoe leather costs.
To save on losing interest in a bank people will hold less cash and make more trips to the bank
- Income redistribution.
Borrowers will become better off, lenders will become worse off, however it depends on the real rate of interest.
- Boom and Bust economic Cylces.
High inflationary growth is unsustainable and is usually followed by a recession. By Keeping inflation low it enables a long period of economic growth. E.g. in the UK growth has been much more stable since 1992. This is one of the most important reasons
- Fiscal Drag.
The amount of tax we pay will increase if there is inflation
- low inflation is often seen as harmless or even beneficial because it allows prices to adjust more easily
Essays and Revision Notes on Inflation
Hyperinflation - Causes and Costs
Inflation Essays
- Discuss the Difficulties of Controlling Inflation
- Does Devaluation Cause Inflation
- Should the Aim of the Government be to Attain Low Inflation?
- Explain What Can Cause a Sustained Increase in the Rate of Inflation
- Essay on Inflation - Is Inflation Harmful?