Effects of inflation Term Paper Example | Topics and Well Written Essays - 1750 words

Effects of inflation - Term Paper Example The reduction in investments level will lead to a reduction in economic growth levels which depend on the level of investments. Inflation makes it hard for firms to plan for the amount of output to produce since the firms cannot forecast the demand for their product at the higher prices they will have to charge to cover costs. High inflation causes speculation on prices and interest rates which in turn increases the risk among potential trade partners, discouraging trade. Inflation reduces the value of depositor’s savings and as well reduces the value of bank loans. In the long run, the company’s revenue and earnings should increase at the same pace as inflation. But it could also reduce the confidence of investors by reducing confidence in investments that take a long time to mature. When there is a high rate of inflation a firm may look as if it is doing well when inflation is the reason behind the growth (Wildermuth, 2012).The effect of inflation on investment occurs directly and indirectly. People are not ready to enter into contracts when inflation cannot be predicted making relative prices uncertain. This reluctance to enter into contracts will affect economic growth. High inflation leads to financial repression as governments take action to protect certain sectors of the economy.Inflation is particularly detrimental to retirees whose pensions and financial investments have to be adjusted for inflation. Pension payments are now indexed to inflation in order to reduce the effects of inflation... When there is a high rate of inflation a firm may look as if it is doing well when inflation is the reason behind the growth (Wildermuth, 2012). The effect of inflation on investment occurs directly and indirectly. People are not ready to enter into contracts when inflation cannot be predicted making relative prices uncertain. This reluctance to enter into contracts will affect economic growth. High inflation leads to financial repression as governments take action to protect certain sectors of the economy. Inflation is particularly detrimental to retirees whose pensions and financial investments have to be adjusted for inflation. Pension payments are now indexed to inflation in order to reduce the effects of inflation Inflation can lead to a poor performance in the stock markets. In times of high inflation, if the firms cannot pass on the extra cost to the consumers they will most likely end up making losses. This will reduce the viability of their stocks and lead to the investors w ho had invested in the firms' stocks will suffer financial setback as the company makes losses. It leads to the changes in the preferred assets held by the wealthy individuals in a country. In the initial stages the three would be a preference for intangible assets so as to make a killing from the interest rates but as inflation increases there is capital flight from the stock markets by foreign and domestic investors and who instead invest their wealth in tangible assets whose value is not likely to be eroded swiftly by the inflationary tendencies. Inflation leads to a reduction in the balance of payments. When the domestic price level rises faster than it is rising