Cost of Inflation
1. Redistributive costs: The inflationary effects on the real income of different group is quiet uneven. Redistributive costs refer to a socirty's real income being redistributed in undesirable ways by inflation itself: from the economically weak to the strong; and from lenders to borrowers.
2. Output costs: Costs of loss of output resulting from inflation. Output cost includes: lower level of investment; menu costs; lower level of net exports.
3. Nominal interst rate=Real interest rate + inflation rate
John E. Sayre and Alan J. Morris, Principles of Macroeconomics: Measuring the Economy's Performance, Edition 6 (Toronto, Ontario: McGraw-Hill 2009), 144-146
  • Increase in income inequality (someone on a fixed income loses)
  • Less exports and more imports
  • Shoe leather costs (opportunity costs of holding cash - the need to spend more and more time earning money to buy the same amount of goods and services - also - the value of money goes down so much that you wear out your shoes going back and forth to the bank to get more cash)
  • Menu costs ( cost to change signage)
  • Reduction in investment (people don't borrow, rates are too high)
  • Business Cycles


Who gains and losses from unexpected inflation?
LOSE/WIN
  • Creditors/Debtors (money as I get paid back as a creditor isn’t worth as much
  • Taxpayers/Government (pushed into a higher tax bracket, pay more to government)
  • Fixed Income/Producers (“sticky wages” only change so often, producers temporarily make more profit)
  • Financial Assets/Real Assets (Financial assets not worth as much)
  • Sellers of future contracts/Buyers
  • Fail to anticipate/Correct forecasters (problem in general if you don’t anticipate inflation)[1]

  1. ^ Economic Growth Lesson Notes ECON 101, Lecture, Red Deer College, Red Deer, AB, February 2012