economic consequences of inflation
- Created by: matthewc123
- Created on: 13-03-18 09:24
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- Economic consequences of inflation
- Income redistribution
- One risk of higher inflation is that it has a regressive effect on lower-income families and older people in society. This happen when prices for food and domestic utilities such as water and heating rises at a rapid rate
- Falling real incomes
- With millions of people facing a cut in their wages or at best a pay freeze, rising inflation leads to a fall in real incomes.
- Negative real interest rates
- If interest rates on savings accounts are lower than the rate of inflation, then people who rely on interest from their savings will be poorer.
- Cost of borrowing
- High inflation may also lead to higher borrowing costs for businesses and people needing loans and mortgages as financial markets protect themselves against rising prices and increase the cost of borrowing on short and longer-term debt.
- Risks of wage inflation
- High inflation can lead to an increase in pay claims as people look to protect their real incomes. This can lead to a rise in unit labour costs and lower profits for businesses
- Business competitiveness
- If one country has a much higher rate of inflation than others for a considerable period of time, this will make its exports less price competitive in world markets. Eventually this may show through in reduced export orders, lower profits and fewer jobs, and also in a worsening of a country’s trade balance.
- Business uncertainty
- High and volatile inflation is not good for business confidence partly because they cannot be sure of what their costs and prices are likely to be. This uncertainty might lead to a lower level of capital investment spending.
- Income redistribution
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