what are some negative impacts of inflation?

Question

I already have the one for how if I make the same amount of money ten years from now that I make now the spending value will be much less. What are some others?try to be a little specific... PLEasE!

Answer 1

Not only do you lose value with inflation, as you state, but for companies it makes the environment more unpredictable. Say you are looking down the line and you want to make a budget for capital and labor expenditures. For example, companies must buy equipment and decide how many workers to hire. Because contracts to buy and contracts with labor are done beforehand, if you make a bad decision about how much capital to spend or labor to hire, you can lose money. Inflation makes it more expensive to buy things (or hire people) and if you underbudget because you think inflation will be lower than it really is, you have made a bad decision that can be costly.

Inflation has two main causes: supply and demand. A higher supply of money can cause inflation, as well as a higher demand. Say you are a government and you start printing more money. By doing this you increase the supply of money available. But if you keep money the same, and simply decrease interest rates, people's propensity to borrow money will grow, because money is more "loose", that is, it is cheaper to borrow. (And also, since interest rates correlate to the return on bank deposits, this means it pays less to keep a savings account than before, so again you are inclined to spend more). The bottom line is that a combination of interest rates and money supply are both involved in inflation. If a government reduces interest rates AND increases the money supply, you get a double dose.

While it is good for governments to encourage loose money because money always has a multiplier effect, meaning money exchanges hands several times over, it can be bad when there is runaway inflation. Runaway inflation happens when some shock occurs. Say oil prices go up, people must spend more for oil, but that means that a lot of products and service that depend on oil are also more expensive. This can have a chain effect where a lot of products and services raise their prices. Since adjustment to those price increases may take time, that means that the economy sometimes is out of balance internally.

The economy can also be out of balance externally. If there is too much money floating about, people are inclined to buy more imports. More imprts means that the value of the currency versus other currencies declines. In effect, this means we owe more money to foreign nations. The US., for example, has a high trade deficit to China at least in part because it is running a budget deficit that makes money too loose. Trade deficits are bad because they result in the loss of capital to overseas. If we were to reduce government spending, it might reduce some of the demand for foreign imports.

Of course, inflation erodes the value of all of your investments. If you have ayearly return of 6% but inflation is 3%, the net real return is only 6-3=3%. If you have a fixed income, say you receive Social Security payments, then inflation erodes your income unless those payments areadjusted with inflation. In fact, those payments are adjusted for inflation, but sometimes there is a delay in that adjustment which means you receive less money(in terms of purchasing power).

Answer 2

this one is right from Wiki:
If inflation is high in an economy there are three main problems it can cause.

1) People on a fixed income (eg. pensioners, students) will be worse off due to higher prices and equal income as before; this will lead to a decrease in their standard of living.

2) Rising inflation can encourage trade unions to demand higher wages. This can cause a wage spiral. Also if strikes occur in an important industry which has a comparative advantage the nation may see a decrease in productivity and suffer.

3) If inflation rises in the UK, exports will look less attractive therefore other countries will be less willing to purchase them. For the UK, imports will look more attractive and this will create a deficit on the current account.

http://en.wikipedia.org/wiki/Inflation#Problems_of_Inflation

hope this helps...

Answer 3

The biggest "negative impact" is the diminished value of savings...

In one scenario a person who saved money for a lifetime was only able to buy a single loaf of bread with those worthless savings...

In France the poor people ended up with bags of worthless cash and no real property.

It can happen again.

Does this help any?

Answer 4

Inflation eats away at the value of money.

So

Companies may not be able to hire as many employees because they will have to raise wages...

Your investments will not be worth as much...

Housing prices can go through the roof...

Answer 5

inflation means to make rise ...our big problem in indiana is the rise in gas prices