Video: Costs of inflation. Risks
2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:46
The consequences and costs of inflation have both positive and negative sides. On the positive side, relatively high rates of growth in prices for all types of manufactured products demonstrate the rapid development of the economy after a long period of stagnation. The negative consequences are associated primarily with the curtailment of the domestic market and the growing risks of impoverishment of the population. However, with an established economy, a stable social situation and political calm, extremely low/high inflation is an "evil" factor that negatively affects the position of both domestic producers and investors.
Economic costs of inflation:
- Growth of transaction costs. Inflation itself is a special form of tax on money. The faster prices creep up, the higher the level of buying up securities or currencies. Banks also receive their share through new deposits. However, if instability in the domestic market is a commoncase, ordinary citizens are saved only by a stable foreign currency. A classic example is home dollar bank vaults in the 1990s. Those who are richer or have connections, of course, made a bet on speculative transactions with securities. In any case, such a "method" also has the right to exist, but only under conditions of relative stabilization.
- Manufacturers constantly update their own price lists and in parallel, incurring large losses in printing, are forced to come up with new marketing moves that stimulate sales. Which is also understandable: the costs of inflation cause people to lose their money, and therefore redirect the surviving funds to purchase everyday goods. Long-term purchases are delayed for a while.
- Microeconomic costs of inflation. The fact is that during a period of high inflation, it is not very profitable for small companies to frequently change their price requests, and even more so to update their product line. They try to minimize additional resources as much as possible, even get a smaller profit, but thereby stay afloat. However, they risk getting lost in a turbulent market: stronger players have the resources and ability to update products and run an advertising campaign. As a result, the costs of inflation lead to a decrease in the share of small businesses in the economy and create some prerequisites for the consolidation of players, the growth of unfriendly cooperation, and in some cases the monopolization of markets.
- Costs of inflation on deposits and other bank deposits. It is clear that banks as commercial structures are not interested in their own losses. Moreover, under any circumstances they make a profit. In this case, an increase in inflation rates leads to a qualitative decrease in interest rates, that is, de jure depositors receive more significant interest, and de facto, taking into account the inflation factor, less profit than in a stable economy.
- Costs of inflation in taxation. Here, too, everything is simple: the higher the inflation rate, the higher the tax costs. Particularly in socially overburdened economies: tax cuts may even increase levels of social instability.
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