Why is unexpected inflation considered to be an economic problem?
what is the cost of doing this?
Answer:
you can lose all your money
Unexpected inflation causes unexpected costs, which for businesses can cause serious problems for the balance sheets and, if serious enough, can delay or stop planned expenses. For consumers, it causes overall decreased spending by delaying purchases or by not purchasing any products at all... For investors, it decreases investment opportunities and instability in the markets which generally drive stock prices down... and therein lie the "costs" you ask for.
The authorities can "reassure" the markets (by cheerleading or announcing warnings), but really have little control over what happens except through interest rate changes. While significant, the interest rate changes can keep inflation low, but are only a REFLECTION of expectations... and those statistically-oriented expectations generate the offical cheerleading pronouncements or warnings.
It's a type of a cycle, because everybody knows that assurance is not truly possible. Assurance relies too much on hope, and that hope is raised or lowered (resulting in an increase the fear factor) by their cheerleading or warnings.
Certainly Capitalism can do better than that... We should work for a better method, me thinks.
its usually a an unexpectantly high inflation that is considered an economic problem. Inflation is never unexpected, since its not possible to not have inflation/deflation.
unexpectantly high inflation means money gets worth less. so for every euro you might have, youll be able to buy less. than you would have the previous year. This means that savings actually reduce in value, and so does the monetary value of investments. This means, youll have to do more work, e.g. make more of a profit, to come out thesame.
inflation simply raises the bar for everyone that has money to 'get ahead' and get a better standard of living. When the bar is raised, its much more likely many people wont get over the bar, and thus have less spending power hte coming year.
less spending power, means theyll be buying less products, which means business will get less profit. which in turn makes sure the stock markets go up less, and makes investors get less profit.
its a viscous circle.
to keep inflation low, Law can be introduced on profit margins. an example of this is the bill recently passed by the EU. stating that internation cellular calls within hte EU may not cost more than 49cents per minute. They can introduce laws that prevent businesses from éxtorting' people by making price arrangements for competitors. Governments can also reduce inflation by lowering the interest rates. They can stimulate the market byinvesting in people's spending power by tax reducts. less taxes means more spending power for hte people, usually leading to a better economy.
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