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INFLATION

Special effects of inflation on consumers and


investors
Introduction to inflation

Inflation is an increase of price of goods and services over time


also inflation is reducing the purchasing power of a dollar ( or
international moneys )
Inflation impacts people in different ways some people benefit
from inflation and some people lose with inflation
Some people that benefits the inflation or at least are not
negatively impacted include holders of low interest fixed rate
loans such as mortgages ( because their interest rates dont
increase ) and investors in commodities such as gold witch are
..
Cont.

,,,,,,,purchased as a hedge against inflation ( because commodity


prices generally track inflation rates)
Some people who lose with inflation include borrowers (
because lenders raise interest rates to match market interest
rates and hedge future inflation ) savers ( because inflation
erodes the value of earnings on saving accounts ) and also
retires
Causes of inflation

Inflation is generally caused by two main factors

Increased demand for products and services such that consumer


demand exceeds available supply

Increased costs of production ( ex : raw materials and labor )


caused by events such as crop losses
Effects of inflation
Inflation effects the purchasing power of wages that dont follow the rise of
prices
Inflation causes diminishing value of loans and savings
Also socially poor persons suffer from inflation more than rich
Impacts of economy balance ; fall of real products bellow potential product
changes in the structure of the consumption ( consumers are buying
cheaper goods )
Inflation deforms prices
Inflation causes higher costs and makes economy less efficient
High inflation and not anticipated inflation signalize serious problems in
economy
Effects of inflation on
investors
Inflation affects many distortions in the economy. we look how it affects the
investors:
Saving money; this expectation reduces economic growth because the
economy needs a certain level of saving to finance investments which
boosts economic growth
Makes harder for business to plan for the future is very difficult to decide
how much to produce because the business cannot predict the demand for
their product at higher prices they will have to charge in order to cover their
costs
High inflation not only disrupts the operation of the nations financial
institutions and markets it also discourages their integration with the rest of
the world markets
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Makes uncertainty about future prices interest rates and exchange


rates ( this turn increase the risk among potential trade partners
discouraging trade it erodes the value of the depositors saving as well
as that banks loans
Uncertainty associated with inflation increases the risk with the
investments and production activity of firms and markets
Reducing investors their confidence in investments that take a long
time to mature
The main problem with stock and inflation is that companys returns
can be overstated
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The effects of inflation on investors is caused direct or in direct


When inflation makes nominal values uncertain investment
planning becomes difficult
In both lenders and borrowers will also be less willing to enter
long-term contracts
If the people cannot trust money than they are less likely to
engage in business relationships this result in lower investments
Effects of inflation on consumers

Inflation occurs when more money circulating than there


are goods and services to buy
For example if needed to sold tickets when there is a lot
of demand for goods and services their prices usually go
up
The supply of money is larger than money demanded
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First we must now CPI ( consumer price index ) components


Food and beverages
Apparel
Housing
Transportation
Medical care
Education
Communication
And other goods and services
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Inequality : inflation has regressive effect on lower-income


families in developed & developing countries

Workers in low paid jops


conclusions

Inflation reduces the purchasing power of money earned by the


poor and their economic welfare.
The workers who do not get compensated for the increase in pricewise,
experience reduction in real incomes because their nominal income
remains constant for a long period
Economic welfare depends upon consumption of goods and services.
During inflation, people consume fewer amounts of goods and services
as a result the economic welfare gets affected