Inflation costs. Risks
The consequences and costs of inflation have bothpositive, and negative aspects. It is positive that the relatively high growth rates of prices for all types of manufactured products demonstrate the rapid development of the economy after a long time of stagnation. The negative consequences are primarily connected with the curtailment of the domestic market and the increasing risks of impoverishment of the population. However, with an established economy, stable social situation and political calmness, extremely low / high inflation is an "evil" factor, negatively affecting the position of both the domestic producer and the investor.
Economic costs of inflation:
- Increase in transaction costs. Inflation itself is a special form of tax on money. The faster the prices creep up, the higher the level of buying up securities or currency. Banks also receive their share through new deposits. However, if instability in the domestic market is a common thing, ordinary citizens are saved only by stable foreign currency. A classic example is the home dollar bank deposits of the 1990s. Those who richer or had connections, of course, relied 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 ownprice lists and in parallel, bearing large losses on printing, are forced to invent new marketing moves that stimulate the level of sales. What is also clear: the costs of inflation lead to the fact that people lose their money, and therefore redirect the surviving financial means for the acquisition of everyday goods. Long-term purchases are postponed for a while.
- Microeconomic costs of inflation. The fact is that in the period of high inflation, small companies are not very profitable to change their price requests frequently, and even more so to update the product line. They try to minimize the additional resources as much as possible, even to get a smaller profit, but thereby stay afloat. However, they risk losing themselves in a troubled market: stronger players have the resources and opportunities to update products and conduct 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 monopolization of markets.
- The costs of inflation on deposits and otherbank 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 the rate of inflation leads to a qualitative reduction in interest rates, that is, de jure investors receive more substantial interest, and de facto, taking into account the inflation factor, a lower profit than under a stable economy.
- Costs of inflation in taxation. Here, too, everything is simple: the higher the rate of inflation, the higher the tax costs. Especially in socially overburdened economies: a decrease in taxation may even trigger an increase in the level of social instability.