Inflation Causes and Consequences

 An increase in the costs of production will generally force sellers to increase prices to maintain profits  Wage costs increase, energy prices increase, raw materials prices increase, capital goods prices increase, transport costs increase, indirect taxes rise ……………  Supply curve shifts to the left. This is a ……….. in supply Cause: Cost-push inflation

 An increase in aggregate demand, caused by an economic boom, allows sellers to increase prices and increase profits.  Incomes increase, unemployment falls, optimism and confidence improves ………  Demand curve shifts to the right. This is an ………. in demand Cause: Demand-pull inflation

 Printing too much money reduces the value of any currency.  This can cause hyperinflation ( see case study page 191)  Post WW1 Germany is another example Cause: Monetary Factors

 If other countries have high inflation import prices will rise. This is very significant for a country like Singapore which depends heavily on imports  Singapore counters this problem but adjusting its exchange rate. Singapore has been slowly increasing its exchange rate over recent years to control imported inflation Cause: Imported Inflation

 The value of money decreases – dollars buy less goods  Consumer purchasing power decreases  Savers lose money because real interest rates may be negative when inflation is high  Lenders lose money because value of the money lent declines  Borrowers are better off because Consequences of inflation

 Fixed income earners or low income earners are worse off because  Exporters are worse off because  Employers are worse off because workers usually demand higher wages to compensate for inflation. This can cause a wage-price spiral  Business confidence falls because …… Low confidence discourages investment More consequences of inflation