Cost of Inflation

  • increase in income inequality: there is a disparity between people on fixed income and people that work because overtime, their wages goes up.
  • less exports and more imports: this can reverse economic growth
  • shoe leather costs (opportunity cost of holding cash)- wore out their shoes having to keep going back to the bank to get more money. refers to the trade of less time and money for other things.
  • Menu costs (cost to change signs)- have to change prices so more money is spent to change signs when prices keep going up
  • reduction in investment- interest rates go up. cost of borrowing money goes up so there is less people who want to borrow money. business spending goes down.
  • business cycles

The winners and losers of inflation
People on fixed income
Owners of financial assets
owners of real assets
sellers of future contracts
Buyers of future contracts
people who fail to anticipate inflation
correct forecasters of inflation
**sellers and buyers of future contract- agreement for future contract used in agriculture and mineral (agree to sell crop when ready)

Dr. Stephanie Powers, "Economic Growth".(Lecture, Donald School of Business, Red Deer Alberta, Winter 2012)