Negative consequences of inflation

• Reduced purchasing power: Inflation erodes the real value of money, so each unit of currency purchases fewer goods and services. This diminishes living standards and undermines confidence in the economy.
• Erosion of savings: The real value of savings declines if nominal interest rates fail to exceed inflation. This discourages saving and hampers future investment by households and firms.
• Higher borrowing costs: Lenders raise nominal interest rates to offset inflation risk, increasing the cost of loans. This deters borrowing, investment, and economic expansion.
• Economic uncertainty: Rapid inflation creates unpredictable prices and wages, complicating business planning. This can stifle growth, reduce investment, and trigger recessions.
• Wealth redistribution: Inflation benefits asset holders (e.g., property or shares) whose values rise, while harming those on fixed incomes or with cash savings, as their real wealth falls.
• Menu costs: Firms face expenses from frequent price adjustments.
  • Examples include reprinting menus in restaurants or updating price labels in stores.
  • These costs are especially burdensome for small businesses, eroding profitability.
• Shoe-leather costs: Individuals incur time and effort seeking better deals amid rising prices.
  • This involves extra travel, time lost shopping, and risks like theft from unfamiliar vendors.
• Fiscal drag: Inflation pushes nominal incomes into higher tax brackets without real income gains.
  • This raises the effective tax burden, curbing disposable income and economic activity.

Positive consequences of inflation (particularly mild inflation):

• Debt relief: The real burden of debt falls, as fixed nominal repayments become cheaper in real terms, encouraging borrowing and investment.
• Profit boost for firms: If prices rise faster than costs, profits increase, potentially leading to higher employment and output.
• Asset value growth: Holdings like property or equities appreciate, enhancing wealth for owners and stimulating confidence.