Inflation is an increase of price of goods and services over time
also inflation is reducing the purchasing power of a dollar ( or international moneys ) Inflation impacts people in different ways some people benefit from inflation and some people lose with inflation Some people that benefits the inflation or at least are not negatively impacted include holders of low interest fixed rate loans such as mortgages ( because their interest rates dont increase ) and investors in commodities such as gold witch are .. Cont.
,,,,,,,purchased as a hedge against inflation ( because commodity
prices generally track inflation rates) Some people who lose with inflation include borrowers ( because lenders raise interest rates to match market interest rates and hedge future inflation ) savers ( because inflation erodes the value of earnings on saving accounts ) and also retires Causes of inflation
Inflation is generally caused by two main factors
Increased demand for products and services such that consumer
demand exceeds available supply
Increased costs of production ( ex : raw materials and labor )
caused by events such as crop losses Effects of inflation Inflation effects the purchasing power of wages that dont follow the rise of prices Inflation causes diminishing value of loans and savings Also socially poor persons suffer from inflation more than rich Impacts of economy balance ; fall of real products bellow potential product changes in the structure of the consumption ( consumers are buying cheaper goods ) Inflation deforms prices Inflation causes higher costs and makes economy less efficient High inflation and not anticipated inflation signalize serious problems in economy Effects of inflation on investors Inflation affects many distortions in the economy. we look how it affects the investors: Saving money; this expectation reduces economic growth because the economy needs a certain level of saving to finance investments which boosts economic growth Makes harder for business to plan for the future is very difficult to decide how much to produce because the business cannot predict the demand for their product at higher prices they will have to charge in order to cover their costs High inflation not only disrupts the operation of the nations financial institutions and markets it also discourages their integration with the rest of the world markets Continue.
Makes uncertainty about future prices interest rates and exchange
rates ( this turn increase the risk among potential trade partners discouraging trade it erodes the value of the depositors saving as well as that banks loans Uncertainty associated with inflation increases the risk with the investments and production activity of firms and markets Reducing investors their confidence in investments that take a long time to mature The main problem with stock and inflation is that companys returns can be overstated continue..
The effects of inflation on investors is caused direct or in direct
When inflation makes nominal values uncertain investment planning becomes difficult In both lenders and borrowers will also be less willing to enter long-term contracts If the people cannot trust money than they are less likely to engage in business relationships this result in lower investments Effects of inflation on consumers
Inflation occurs when more money circulating than there
are goods and services to buy For example if needed to sold tickets when there is a lot of demand for goods and services their prices usually go up The supply of money is larger than money demanded Continue
First we must now CPI ( consumer price index ) components
Food and beverages Apparel Housing Transportation Medical care Education Communication And other goods and services Conti..
Inequality : inflation has regressive effect on lower-income
families in developed & developing countries
Workers in low paid jops
conclusions
Inflation reduces the purchasing power of money earned by the
poor and their economic welfare. The workers who do not get compensated for the increase in pricewise, experience reduction in real incomes because their nominal income remains constant for a long period Economic welfare depends upon consumption of goods and services. During inflation, people consume fewer amounts of goods and services as a result the economic welfare gets affected