How Can Inflation Hurt The Economy?

Question

How Can Inflation Hurt The Economy?

Answer 1

It makes your money worth less, if the prices of everything goes up 50%, then you have much less money to spend on other things. Look at the inflation of gas, spend mroe on gas, spend less on everything else because you cant afford anything else.

Answer 2

can be lead to stagflation- unemployment + inflation

devalues money which could lead to ppl turning towards different currency

could lead to a recession or depression

could hurt various job sectors (b/c suppliers would experience an increase in costs and would therefore have less ability to supply at the same price, which would lead to an overall decrease in supply which may be accompanied by same level of demand which would create a shortage)

could lead to an inefficent market, b/c ppl won't know what prices to expect, which could lead to a deadweight loss (loss of transactions for suppliers and consumers)

Answer 3

A worker's real income gets eroded. A businessman can always hike his cost price. Once the labour is short-changed and productivity falls, overall economy that depends on so much worthless paper, suffers.

Answer 4

it makes imports more expensive and exports less competitive abroad

(or maybe the other way around, I'm too tired to reason it out right now)

Answer 5

High inflation is bad because it creates volatility and unpredictability. Inflation which is high but steady say at 10% is also considered bad because it creates "shoe leather costs" i.e. in simple terms the fact that people have to make more and more trips to the cashpoint or bank to keep up with the rising prices. It will also create "menu costs" which are the costs to businesses of re-pricing its items to keep up with inflation. High Inflation is also bad because it can create a wage spiral, whereby wage setters demand higher wages to allow for the higher cost of living, but in turn price setters will just raise prices to keep up with the higher cost of paying wages - and so a vicious inflationary cycle is created.

Hyperinflation as seen in Zimbabwe is disastorous for a country as it effectively renders currency worthless as prices will often double numerous times in a day.

Negative inflation (although rare) is usually also seen as harmful. If inflation is negative, wages may need to be cut in nominal terms (not necessarily real terms) to maintain the status quo, but for obvious reasons workers are reluctant to accept any form of wage cut even though in real terms it may not actually be a cut at all.

It is usually agreed that low and stable inflation is the optimum, usually around the 2% mark. This allows for confidence and stability and gives wage setters the flexibility to cut wages in real terms yet still raise them nominally, so as to give the impression of a wage rise. Result = everyone happy (probably).