Consequences of inflation Flashcards
What are 5 consequences of inflation?
1) Uncertainty
2) Savings are eroded
3) People on fixed incomes lose purchasing power
4) Possibility of a wage-price spiral
5) Loss of international competitiveness
What does Uncertainty mean?
Inflation affects prices and costs to businesses making it difficult to plan for the future
What are Savings are eroded?
Money put in banks or loaned out loses it value
What does People on fixed incomes lose purchasing power mean?
Prices rise while incomes don’t
What does Possibility of a wage price spiral mean?
Higher prices may lead to workers demanding higher wages as they don’t want their real standards of living falling .
What does a lose of international competitiveness mean?
The economy will become internationally noncompetitive if we are assuming that other countries don’t have inflation or have a lower rate of it. Exports are expensive and imports cheaper.
What does Uncertainty depend on 3 things?
1) How much stock the business hold for the future
2) May matter less for products with an inelastic demand
3) How much raw materials are domestic/ foreign.
What does How much stock the business hold for the future mean?
Won’t affect you for a while untill you need to buy new stock if you have a warehouse
What does may matter less for products with an inelastic demand?
An increase in costs can be passed onto price to consumers.
What 3 things does Savings are eroded depend on?
1) If interest rate is greater than inflation rate
2) Less money in banks available for investment
3) Made worse if there is a disincentive to save and AD increases.
What 2 things does People on fixed incomes lose purchasing power depend on?
1) The amount of people on fixed incomes ( if there is a little it won’t make a difference)
2) The level of government welfare provided (adjusted to inflation) e.g tripple lock
What is the triple lock?
Basic state pension will rise by annual rise of 2.5%, the highest rate of inflation and average earnings growth. Which ever is the highest is what it will go up by.
What are 2 things that Possibility of a wage price spiral depends on?
1) Trade union power
2) Skills of workforce.
What are 2 things that Loss of international competitiveness depends on?
1) prices/inflation in other countries
2) PED of exports ( few substitutes, necessities, brand loyalty. PED is different for different people.
