In simple language, inflation means rising prices and it shows the increase in cost of living. In economics, inflation is explained as rise in the general level of prices of goods and services in an economy over a period of time. With the rise in price levels a unit of currency will buy fewer goods and services. As a result, the purchasing power of money will be reduced with inflation. In other words the real value of money will be lost day by day along with inflation. Inflation is measured by the Rate of Inflation or Inflation Rate which is the percentage change in a general price index calculated as an annualized figure.
A low inflation rate is beneficial to a country and zero or negative inflation is considered as bad. Also, a high inflation is harmful to an economy and it affects an economy in many ways.
- High inflation distorts consumer behavior. Because of the fear of price increases, people tend to purchase their requirements in advance as much as possible. This can destabilize markets creating unnecessary shortages.
- High inflation redistributes the income of people. The fixed income earners and those lacking bargaining power will become relatively worse off as their purchasing power falls.
- Trade unions may demand for higher wages at times of high inflation. If the claims are accepted by the employers, it may give rise to a wage-price spiral which may aggravate the inflation problem.
- During a high inflation period, wide fluctuations in the inflation rate make it difficult for business organizations to predict the future and accurately calculate prices and returns from investments. Therefore, it can undermine business confidence.
- When inflation in a country is more than that in a competitive country, the exports from former country will be less attractive compared to the other country. This means there will be less sales for that country’s goods both at home and abroad and that will create a larger trade deficit. At the same time, high inflation in a country weakens its competitive position in the international market.
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andy on November 07, 2015:
thanks for this. really helped with my business studies homework :)
gilly on August 14, 2015:
nice job well done
Ezah Ruth on June 22, 2015:
good explanation ,good work done
muchohonyi on February 04, 2015:
how does a high rate of inflation affects industries
meldon on October 20, 2014:
thank you very much may god bless you :)
Cameo on July 27, 2013:
I would like to find springs for twin beds which could be used as bunk beds or sertapae twin beds. They might have been sold by Sears? There are 2 wooden slats to hold the springs in place, which sit in wooden pieces on the bedrails. If I can find springs for these beds, I would like to pass them along to my granddaughter for her 2 daughters.The springs were not coil but elongated triangles fastened together with twists of metal.Do you know of a source for such springs which would not cost an arm and a leg to buy?Many thanks for your help,Aileen
Howard Schneider from Parsippany, New Jersey on July 15, 2013:
Excellent and complete analysis of this critical business factor, LasanthaW. Thumbs up to you.
91398 on March 03, 2013:
Thank you I will be plagiarizing your work!
Wole on May 28, 2012:
Thank you for helping us
zinhle on May 21, 2012:
what are the effect of high and low inflation rate on borrowing of money (consumer)?
Jessica on May 20, 2012:
Thanks but I think you can do better
lindani Ngcobo on May 10, 2012:
I would like to thank you hub sofisticated help i found. but i just have one quation, what effect does the inflation have on investment spending both in households and firms?
hammed on May 07, 2012:
that is good to let those people know how to solve they are problem
Sandya on March 24, 2012:
Thanks, I badly needed this explanation.
Mr Tindle on November 24, 2010:
Good Hub. One thing I would add to your points. Inflation is ultimately a "Stealth Tax". It's a hidden form of taxation. When Governments want to spend money they don't have they often resort to the ease of cheap borrowing or even just printing money. Though it seems like free or cheap money at the time, there is a cost found in the inflation that a country's people will have to suffer through eventually.
Lasantha Wijesekera (author) from Sri Lanka on September 17, 2010:
Cheeky Girl, thanks for your comments.
Cassandra Mantis from UK and Nerujenia on September 10, 2010:
High inflation is what we do not want. This is a great hub, points well made!
Lasantha Wijesekera (author) from Sri Lanka on July 31, 2010:
Thanks for your comments.
kims3003 on July 30, 2010:
Great hub - nicely done. A+!