Effects of inflation (1 Viewer)

[rsingh]

Hey guys, I need some help with the effects of inflation.
If someone could give me a rundown on how individuals, firms and governments are affected by high levels of inflation and low levels of inflation.

Your help will be greatly appreciated.
Thanks!

 

[~ ReNcH ~]

High inflation results in:
- higher costs for consumers and hence higher wage demands, possibly resulting in self-perpetuating inflation and inflationary expectations
- increased production costs leading to even higher prices
- decreased international competitiveness due to higher production costs
- the need for the RBA and the Government to implement further monetary policy (through increased interest rates) to curb the rise in inflation

Inflation should be kept at around 2% per year to maintain a stable economy. If inflation is too low, this may also be seen as a pont of weakness as it may suggest that economic growth is also low. Investors would most likely withdraw from Australia and invest elsewhere. This could destabilise the AUD and worsen Australia's economic position.

 

[Oz]

Hey guys, I need some help with the effects of inflation.
If someone could give me a rundown on how individuals, firms and governments are affected by high levels of inflation and low levels of inflation.

Your help will be greatly appreciated.
Thanks!

individuals would stuff from lower real wages meaning that they are less likely to spend on luxury goods as they can't afford it, likewise because of the lowering of the real interest returns (i rate - inflation) they have less incentive to save.

firms have less incentive to invest in capital goods as the returns on investment must cover the increasing inflation as well as normal costs, they also face increasing costs both in materials and more importantly in wage costs forcing them to increase prices and creating an upward circle.

governments have to deal with the lower levels of business investment and lower demand in the economy as well as trying to avoid stagflation where both unemployment and inflation rocket upwards

hope that helps

 

[Rafy]

Well In your question you say high levels / low levels of inflation. Well the effects are the same for both, just to a greater extent if inflation is 'high'.

Those who gain from Inflation:

- Borrowers (The principle of the loan becomes less in real terms)
-Owners of real assets (the value of these tend to appreicate around the rate of inflation)

Those who loose:

-People on fixed dollar incomes (i.e Superannuation etc) this is beacuse the value of their payments is less in real terms.

-Lenders. (Beacus ethe princpal on a loan is less in real terms, they loose out)

-Those who hold money as cash. (The value of the money in real terms declines)

- Exporters (Increased costs; reduced international competitiveness)


As you can see most of the effects of inflation come down to inflation erroding the real value of money.


As rench says, the RBA likes inflation at around 2-3%