Exactly why is a high rate of inflation bad for the economy?

Question

Exactly why is a high rate of inflation bad for the economy?

Answer 1

Inflation in money means there is more bills floating around right?  If there are more bills that means there should be more gold (the global sign of wealth).  You could go to anywhere and trade in your $ bills for a amount of gold but when there are to many bills and not enough gold the worth of the dollar goes down.  Instead of equaling a 100cents a dollar may begin to decrease to 92cents of even less

hope that helps

Answer 2

High inflation means that prices become meaningless.

Prices act as signals of value in the economy, and we know if we want to buy/sell/produce based on prices.

If inflation is high we are unable to tell if price changes are to do with actual changes in value or just inflation. This means we will be put off from buying things and are less likely to repond to real prices which reduces economic efficiency and welfare.

Also, high inflation makes our goods less competitive abroad - unless the exchange rate changes, which can cause other problems - which will worsen the balance of payments.

Thirdly high inflation leads to people forward-buying big purchases (if I want to buy a dishwasher for example I'll want to buy it now instead of in a couple of months when the price will be higher) which can also push inflationary pressures.

A fourth factor is known as 'menu costs' which quite simply means that shops/restaurants etc. have to keep changing their prices, and companys have to keep changing their wages, which, unsurprisingly, is costly.

Finally inflation is bad because in order to reduce it employment/output may have to be reduced for long periods of time (although supply-side policy can also be used, which is less costly in that respect).

Answer 3

Your money becomes worth less. High rates of unemployment occur.

Answer 4

Both of the prior answers are wrong. High inflation is generally equated with lower unemployment, not the reverse (more people have jobs => more disposable income in the economy => higher inflation). And we've been off the gold standard for decades, so it has nothing to do with the convertibility of dollars into gold.

Inflation is not inherently bad, but it can enact a heavy toll on living standards since the same amount of money buys less goods. It also makes the value of the dollar relatively less than that of foreign currencies, with the effect that it is more expensive for Americans to purchase foreign imports - and conversely it is cheaper for foreigners to purchase American exports (one of the perceived benefits of currency devaluation).

However, high inflation can also lead to significant instability in the economy, as supplier costs can increase rapidly while, at the same time, consumers are able to afford less and less.