Costs and Benefits of inflation

• The macro objective for inflation is low and stable inflation, which implies that if inflation gets very high out of control, there are more costs than benefits.
• High inflation erodes the purchasing power of money and savings, and can affect the living standards of those on the lowest incomes in society.
• High inflation can erode export competitiveness if inflation is high in one country relative to others, reducing demand for exports and worsening the current account position.
• Governments benefit from inflation as they receive a fiscal windfall from higher taxes and increased revenue from inflation-linked taxes.
• Firms can increase revenue by giving workers a small pay rise, as their costs are increasing by a larger amount.
• Workers stay in work during a recession when they might see unemployment rising in other parts of the economy.
• Anticipated inflation can be harmful as it often leads to hyperinflation concerns.
• Higher rates of inflation can lead to significant costs and risk spirals, making long-term high rates of inflation a concern.
• The stability of the inflation rate is crucial as more volatile inflation can harm consumption and investment in the economy.
• Inflation reduces the real value of debt, making it easier to service.
• The risk of high inflation becoming anticipated and then spiraling into hyperinflation can happen in two ways: through a wage-price spiral as inflation is high and workers anticipate it, leading to higher wages and higher prices, and through consumer behavior as rational consumers bring forward their consumption to protect themselves from anticipated high future inflation.
• Menu costs are a concern in high inflation as firms have to continually print new menus and price tags.
• A little bit of inflation can mean unemployment stays low in a recession as firms prefer to keep skilled productive workers instead of sacking them.
• Inflationary noise is when the inflation rate is volatile, making the price signaling function of market forces lose its value.
• Firms can keep workers in place during a recession by raising their prices by the inflation rate.
• Firms are encouraged to increase output if inflation is low and stable as they can raise their prices and earn more revenues.
• One benefit of inflation is that workers can bargain for higher wages even if they only get an inflation-equaling pay rise.
• Fiscal drag is a situation where workers receive higher income but only in line with inflation, leading to a decrease in living standards.
• Consumption will happen naturally in a low and stable inflation environment as consumers will not bring forward or delay their spending anticipating deflation.