Why Is Inflation Bad?

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  • Topic: Inflation, Consumer price index, Money
  • Pages : 3 (1015 words )
  • Download(s) : 281
  • Published : October 27, 2012
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Why is inflation bad?
What is inflation?
Inflation is a process of continuous increase in the prices of most goods and services in a country. This does not necessarily mean that all prices increase. There may be some exceptions, such as computer prices which have actually declined in recent years. Inflation can therefore be described as a persistent general increase in prices. How inflation is measured

Inflation is measured by defining a basket of goods and services used by a "typical" consumer and then keeping track of the cost of that basket. In the twelve months up to January 1997, the cost of that basket rose by 9,4 per cent. This increase of 9,4 per cent in the so-called consumer price index is referred to as the inflation rate. From 1974 to 1992 the South African inflation rate has ranged between 10 and 20 per cent. It has been brought down to less than 10 per cent per annum since 1993. Why is inflation bad?

Inflation is regarded as a bad process because it leads to distortions and problems in an economy. A short list of the key disadvantages of inflation includes the following: Losses to savers: If you save your money by hoarding cash, inflation erodes the purchasing power of the amount saved. For instance, R100 put underneath a mattress ten years ago can now purchase only one third of the goods and services that it could have done in 1987. Even if you save in the form of savings deposits which pay interest, the interest may not be enough to compensate you in full for inflation. This also applies to pension planning, where a person may, for example, save for a pension during his entire working life, just to find at the end of his career that his savings have been eroded by inflation. Losses to people with fixed incomes: People with fixed incomes (such as the interest on a fixed deposit, or a fixed salary) find that the purchasing power of their income diminishes over time. The wealthy, in contrast, can usually partly protect themselves against...
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