Increase in prices of commodities result into reduced purchasing power. It is vital to note that the impacts of inflation are not uniformly distributed but they are benefits to some while at the same time they are hidden costs to majority of consumers. For instance, during inflation, the prices of physical assets increase thus making the owners to enjoy increased value of their assets (Auernheimer 25). But on the other hand, individuals who are willing to purchase the assets will pay more. Another impact of inflation is that it results to erosion of real value of money.
One of the key impacts of inflation is that it results into inefficiencies that affect the budgeting and planning strategies of a government and firms. Based on its effect of reducing the real value of money, inflation makes firms to incur profits and losses. Another effect of inflation is that it results into uncertainties in the consumer’s purchasing power. As a result, there is low demand of products the level of investment as well as saving decreases.
Despite the negative implications of the inflation on the economy, a moderate inflation allows real wages to decrease even if nominal wages are not changed resulting to equilibrium in the labor market. According to Robert Mundell theory, a moderate inflation allows savers to increase their amount of savings in order to have adequate funds to finance future activities. Through the increased saving, money is supply is put under control thus creating an economic equilibrium Conclusion In their efforts to regulate money supply, central banks emulate various microeconomic policies. These include open market operations, increasing or decreasing the rate on interest, discount rates and bank reserves among others. In cases the money in circulation increases to uncontrollable level, inflation results. Similarly, from the above discussion, it is clear that based on the