1. Effects of Inflation Md. Nuruzzaman, Ph.D. Director (Training), NAPD 1

2. 2 Effects of Inflation  Impact on Output - In general inflation has major costs for the economy, the producer and the consumer.

3. 3 Effects of Inflation  Inflation causes productive investment to fall because profitability falls, speculative investment rises which has a negative effect on employment, output and income. Inflation causes resources to be misallocated.

4. 4 Effects of Inflation  Inflation causes uncertainty to increase which can erode business and consumer confidence.  The drop in confidence can reduce investment and consumption which produce downward pressure on employment and production.

5. 5 Effects of Inflation  Inflation leads to domestic interest rates increasing. Like other prices, the price of money rises to compensate suppliers of money (lenders/savers) for the falling value of the dollars they are repaid. This reduces investment and consumption leading to negative effects on employment and output.

6. 6 Effects of Inflation  If inflation rate is greater than overseas inflation rates, exports decrease and imports increase. This reduces output and employment. Inflation makes a country less internationally competitive, the Current Account deficit also rises.

7. 7 Effects of Inflation  Government may tighten fiscal and monetary policies to reduce inflation, thus causing unemployment to rise and production to decrease.

8. 8 Effects of Inflation  Inflation causes a redistribution and reallocation of resources to the following groups:  Speculators  Borrowers/Lenders  Strong Employee Groups in Key Industry  Monopolies / Oligopolies in Key Industries  Government

9. 9 Effects of Inflation  Speculators: buy and sell property, collectables (eg: art precious metals) etc. during inflationary periods because these items rise faster in price than the general price level which results in Speculator’s real income increasing.

10. 10 Effects of Inflation  Borrowers/Lenders - (depending on interest rates): borrowers benefit if the inflation rate is greater than the interest rates. They pay back dollars of less value and lenders lose.

11. 11 Effects of Inflation  Strong Employee Groups in Key Industries: can use industrial ‘muscle’ to gain wage/fee increases greater than other groups of employees and the inflation rate ( distributive affect).

12. 12 Effects of Inflation  Monopolies / Oligopolies in Key Industries: can raise their prices ahead of inflation and / or pass on cost increases to consumers to maintain or raise profits (distributive effects).

13. 13 Effects of Inflation  Government: revenue rises due to bracket creep, ie: inflation lifts people into higher income and marginal tax brackets, where they pay a higher proportion of income tax to the government.

14. 14 Effects of Inflation  Inflation causes a redistribution and reallocation of resources away from the following groups:  Fixed Income Earners  Weak Union or Non-union Sections of the Workforce  Borrowers/Lenders  Firms in Highly Competitive or Depressed Industries  Savers

15. 15 Effects of Inflation  Fixed Income Earners: real incomes decrease as changes to money incomes lag well behind inflation e.g: the unemployed, public servants etc.

16. 16 Effects of Inflation  Weak Unions or Non- unionised Sections of the Workforce: their money incomes fall behind inflation because they lack industrial ‘muscle’.

17. 17 Effects of Inflation  Borrowers/Lenders (depending on interest rates): borrowers lose if interest rates move ahead of inflation. Lenders anticipate inflation and raise rates to protect real returns.

18. 18 Effects of Inflation  Firms in Highly Competitive or Depressed Industries: rising costs reduce profits when firms cannot easily raise prices.

19. 19 Effects of Inflation  Savers: savings in conventional low interest bank deposits lose value.

20. 20 Effects of Inflation  Conclusion: Inflation transfers income between competing income groups. It causes a redistribution of income away from weaker, low income earners to more protected high earners in both private and public sectors.

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