consequences of inflation

consequences of inflation - Consequences of Inflation Why...

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Consequences of Inflation Why does inflation matter? The impact of inflation on individuals and businesses depends in part on whether inflation is anticipated or unanticipated: Anticipated inflation: When people are able to make accurate predictions of inflation, they can take steps to protect themselves from its effects. For example, trade unions may exercise their collective bargaining power to negotiate with employers for increases in money wages so as to protect the real wages of union members. Households may also be able to switch savings into deposit accounts offering a higher nominal rate of interest or into other financial assets such as housing or equities where capital gains over a period of time might outstrip general price inflation. In this way, people can help to protect the real value of their financial wealth. Companies can adjust prices and lenders can adjust interest rates. Businesses may also seek to hedge against future price movements by transacting in “forward markets”. For example, most of the major airlines buy their aviation fuel several months in advance in the forward market, partly as a protection against fluctuations in world oil prices. Unanticipated inflation: When inflation is volatile from year to year, it becomes difficult for individuals and businesses to correctly predict the rate of inflation in the near future. Unanticipated inflation occurs when economic agents (i.e. people, businesses and governments) make errors in their inflation forecasts. Actual inflation may end up well below, or significantly above expectations causing losses in real
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consequences of inflation - Consequences of Inflation Why...

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