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Discuss whether inflation always harms an economy
Inflation is a sustained raise in the price level over a given time period
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The
bank of England set interest rates to try and influence inflation rates
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5% and in Europe there was deflation
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Menu costs are one consequence of inflation
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This term is applied in general to the
cost in both time, money and effort that a business incurs as a result of continually having to
update prices in line with inflation
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Also it affects companies who work largely
out of catalogues whose printing and distrusting costs are high
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Another harm effect on inflation one an economy is shoe leather costs
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Savers are constantly required to
search the market for the highest interest rates so that their money does not lose value when
stored in a bank, especially in current accounts
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Inflationary noise is anther harmful effect on an economy as a result of inflation
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This is a problem because the constantly
increasing prices means that consumers and businesses are constantly having to research the
market taking up time and effect and money to find the best deals in the market, they may make
the wrong purchasing decision
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However they type of inflation is very important for determining whether inflation is always bad for
an economy
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Demand pull is
associated with being better for the economy than cost push
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However as you can see in diagram 2 with cost push inflation caused by a shift left in S to S1 the
increase in P1 from P* also causes a decrease in real GDP from Y* to Y1 this is negative economic
growth, which causes unemployment which is bad for economy
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In addition there are also psychological benefits of inflation
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This ability to increase wages without increasing the cost of production can also benefit companies
who are struggling financially as they can decrease the cost of real wages by increasing wages at a
lower rate than inflation, thus allowing them to cut costs without decreasing pay or making workers
redundant in order to reduce costs
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However the extent to which inflation
is harmful depends upon the size of it, the duration of it and the type
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Low steady inflation is better than fluctuating high inflation or deflation
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More over having a
set target of inflation is better because it creates stability and prevents uncertainty

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