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How high inflation rate affects on business and economy

In simple language, inflation means rising prices and it shows the increase in cost of living. In economics, inflation is explained as rise in the general level of prices of goods and services in an economy over a period of time. With the rise in price levels a unit of currency will buy fewer goods and services. As a result, the purchasing power of money will be reduced with inflation. In other words the real value of money will be lost day by day along with inflation. Inflation is measured by the Rate of Inflation or Inflation Rate which is the percentage change in a general price index calculated as an annualized figure.

A low inflation rate is beneficial to a country and zero or negative inflation is considered as bad. Also, a high inflation is harmful to an economy and it affects an economy in many ways.

  • High inflation distorts consumer behavior. Because of the fear of price increases, people tend to purchase their requirements in advance as much as possible. This can destabilize markets creating unnecessary shortages.
  • High inflation redistributes the income of people. The fixed income earners and those lacking bargaining power will become relatively worse off as their purchasing power falls.
  • Trade unions may demand for higher wages at times of high inflation. If the claims are accepted by the employers, it may give rise to a wage-price spiral which may aggravate the inflation problem.
  • During a high inflation period, wide fluctuations in the inflation rate make it difficult for business organizations to predict the future and accurately calculate prices and returns from investments. Therefore, it can undermine business confidence.
  • When inflation in a country is more than that in a competitive country, the exports from former country will be less attractive compared to the other country. This means there will be less sales for that country‚Äôs goods both at home and abroad and that will create a larger trade deficit. At the same time, high inflation in a country weakens its competitive position in the international market.

Comments 15 comments

Cameo 15 months ago

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HSchneider 15 months ago from Parsippany, New Jersey Level 5 Commenter

Excellent and complete analysis of this critical business factor, LasanthaW. Thumbs up to you.


91398 20 months ago

Thank you I will be plagiarizing your work!


Wole 2 years ago

Thank you for helping us


zinhle 2 years ago

what are the effect of high and low inflation rate on borrowing of money (consumer)?


Jessica 2 years ago

Thanks but I think you can do better


lindani Ngcobo 2 years ago

I would like to thank you hub sofisticated help i found. but i just have one quation, what effect does the inflation have on investment spending both in households and firms?


hammed 2 years ago

that is good to let those people know how to solve they are problem


Sandya 2 years ago

Thanks, I badly needed this explanation.


Mr Tindle profile image

Mr Tindle 3 years ago

LasanthaW,

Good Hub. One thing I would add to your points. Inflation is ultimately a "Stealth Tax". It's a hidden form of taxation. When Governments want to spend money they don't have they often resort to the ease of cheap borrowing or even just printing money. Though it seems like free or cheap money at the time, there is a cost found in the inflation that a country's people will have to suffer through eventually.


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LasanthaW 4 years ago from Sri Lanka Hub Author

Cheeky Girl, thanks for your comments.


Cheeky Girl profile image

Cheeky Girl 4 years ago from UK and Nerujenia Level 1 Commenter

High inflation is what we do not want. This is a great hub, points well made!


LasanthaW profile image

LasanthaW 4 years ago from Sri Lanka Hub Author

Thanks for your comments.


kims3003 4 years ago

Great hub - nicely done. A+!

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     Last updated on August 3, 2012

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