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This is just a different way of defining inflation. The rise in prices in an economy decreases the purchasing power of a currency. For instance, in the USA, a cup of coffee, on average, used to cost a dime. However, today the price is almost two dollars
- It Decreases Purchasing Power
A decline in purchasing power usually has a predictable response of by now rather than later. Since cash is losing value, most consumers tend to go out and shop for things that probably won’t lose value. On the other hand, businesses venture into investments which under different circumstances might not be made.
- It Encourages Investing And Spending
The government has a powerful incentive to keep inflation in check. The US government has been using monetary policy approach to manage the rise of prices. To achieve this the central bank depends on the relationship between interest rates and inflation. Low-interest rates mean individuals and firms can get loans cheaply to start a business, recruit more employees or buys an asset. However, a rise in interest rates means there is not so much cash sloshing around. In other words, there is a scarcity of money.
It has been proven that inflation can push down unemployment. Wages are known to change slowly in response to shifts in the economy. According to John Maynard Keynes, the great depression came about as a result of the downward stickiness of wages. Unemployment became rampant because workers refused to settle for pay cuts. As a result, they were fired. This theory is also true in reverse. If inflation takes a certain toll, the payroll cost fall and employers are able to hire more workers.
Inflation is known to discourage individuals from saving. This is because the purchasing power of deposits decreases with time. This offers a platform to consumers and business to invest or spend. The short-term investment at least leads to the growth of an economy.
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- It Raises The Cost Of Borrowing