Inflation is a general sustained rise in the price level which is generally considered to bring costs to society is the form of material, political and psychological costs.
Inflation is measured as a percentage change in the RPI over a given period of time, for example, if the RPI increases from 100 to 120 in a year, then inflation is said to have increased by 20% that year.
Inflation has many effects on society. Increasing the prices of goods leads consumers and firms to be less clear about fair pricing meaning that people will shop around more which is a cost in itself. People will hold less cash and more interest bearing deposits.
All firms have to increase prices to make enough real revenue. Price increases are very unpopular and can also affect social order as high inflation can often be accompanied by change of governing powers, and revolution. There can also be redistribution of income and wealth between households, firms and the state. People on fixed incomes and pensions will suffer as their real PDY decrease. It real interest falls then there will be a transfer of resources from borrowing to lending and people with savings will see the real values of their money decrease.
Inflation can cause unemployment as it increases the costs of production lowering businesses' profitability and causing more uncertainty and less investment. Businesses men are less willing to take the risk associated with any investment project which results in less long-term employment and long term growth.
Balance of payment may be affected by inflation if inflation rises faster in the Uk than in other countries, and the values of the pound does not change on foreign currency markets. Exports will become less competitive and imports more competitive. The result will be a loss o jobs in the domestic economy and lower growth.
Menu cost is caused by inflation. When there is inflation, restaurants have to change their menus to show increase prices, shops have to change their price labels and firms have to calculate issuing the new price lists.
