Lesson 36 ª

 

 

 

 

 

    

 

Inflation (II)

Effects of inflation


Inflation negatively effects the economy:

It harms those people whose income usually grows less with inflation, like in the case of those that are retired or unemployed, etc.

It benefits the debtors (the amount they owe looses value) and it harms the creditors.

It generates uncertainty, making investing difficult: it is very difficult to foresee income and expenses in the long term, as price variations will make any hypothesis invalid.

Products, once they have increased in price, loose their competitivness in the foreign market.

It usually has a negative fiscal impact: inflation tends to increase the tax burden.

Let's look at an example: a year ago we bought a piece of furniture for 100.000 euros which is now worth 110.000 euros (inflation is at 10%). In realisty we have not gained anything (110.000 euros now is the same as 100.000 euros a year ago), but if we sell this piece of furniture for this amount according to the Inland Revenue we have gained 10.000 euros and we will have to pay tax on it.

Policies against inflation

In the fight against inflation the government usually applies certain policies 

which try to slow down demand, they are usually fiscal or monetary, with the 

aim of trying to reduce the rhythm of growth and decrease the upward 

pressures on prices.

It is also important to control the growth of the money we have already seen that
this has a decisive impact on the price increase.

It will also be essential to employers and unions to moderate wage increases.

With the increase in prices plays a crucial role the inflation expectations: 

If the unions believe that inflation next year will be 10% in the negotiation of collective agreements seek increases at least that amount. This mechanism contributes to the inflationary process. 

Therefore, the governement's credability is fundamental in the fight against 

inflation:

If the government has a good anti-inflation history, Si el gobierno tiene un buen historial antiinflacionista, las estimaciones que realice sobre el crecimiento esperado de los precios gozarán de credibilidad y los diferentes actores económicos (empresarios, trabajadores, sindicatos, etc.) tratarán de ajustar sus peticiones de subida a estas estimaciones.


 

  
     
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