Economic Effects of Inflation

Benefits to GovernmentIf the government is a borrower and the rate of inflation is greater than the rate of interest, the amount to repay is falling.Similarly, the government receives more income from direct/indirect taxes

Economic Effects of Inflation

Production/Consumption EncouragedThe higher the prices of goods, the more a producer will produce, to capitalise on the high prices.Also, "inflation psychology" plays into the minds of consumers - they expect prices to continue to rise, so buy it at the present "lower" costs

People On Fixed Incomes Lose OutPeople who receive the same amount of income each year see a decrease in the purchasing power of their income, and they are not in a position to increase their income to compensate for inflation.An example of this would be pensioners on a fixed pension

Speculation EncouragedPeople transfer their money out of cash into assets that they speculate to increase.Examples of these assets include property or company shares

Loss of International CompetitivenessIf a country's inflation is greater than that of its trading partners, its exports will be more expensive compared to the produce of the trading partners, and there will be a drop in demand for them.Also, imports will be comparatively cheaper than home-grown products.This has an effect on a country's balance of payments.

Economic Effects of Inflation