Author: Geoff Riley Last updated: Sunday 23 September, 2012
Analysing the Consequences of Inflation High and volatile
inflation has economic and social costs. When people are able to
make accurate predictions of inflation, they can take steps to
protect themselves from its effects. Trade unions might use
their bargaining power to negotiate for increases in money wages
to protect the real wages of union members. Households may
switch savings into accounts offering a higher rate of interest
or into other financial assets where capital gains might
outstrip price inflation. Businesses can adjust prices and
lenders can adjust interest rates. Businesses may also seek to
hedge against future price movements by transacting in “forward
markets”. For example, many airlines buy their fuel months in
advance as a protection or ‘hedge’ against fluctuations in world
oil prices. When inflation is volatile, it becomes difficult for
individuals and businesses to correctly predict the rate of
inflation in the near future. Unant