4 big Reasons why Inflation Needs to be Avoided at all Costs

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From a financial point of view, inflation is a situation best avoided altogether. That is not always possible, yet the current behavior by most central banks seems to facilitate an inflationary outcome. What does this mean for the average consumer, and how will it impact them?

Decreasing Purchasing Power

The first sign of inflation taking hold is the overall decrease in purchasing power for both consumers and companies. General price levels tend to increase, yet no one is earning more money. As such, every unit of a currency can buy fewer goods and services. This impact can be minimal at first, yet has the potential to spiral out of control if left unchecked.

A decrease in purchasing power can prove beneficial to those who own any tangible assets. During times of decreasing purchasing power, owners of real estate often see the price of their property increase. That doesn’t mean it will be easy to sell one’s property, but it can still be a positive side effect of inflation regardless.

The worst asset to own during such a period is regular currency. Especially cash will make it more “real” that one’s purchasing power is on the decline. While it does not differ much from making electronic payments, a lighter wallet has a different mental impact compared to seeing a bank account’s figures go down slightly faster than normal. 

Disrupting Market Efficiency

Depending on how badly the inflation becomes, it is possible a country’s market will become inefficient. For companies, this means no long-term planning or budgeting can occur. It also becomes a lot more complex to make active investments, either in goods or personnel. In some cases, it may become necessary to shift resources around in order to stay afloat. 

As far as average consumers go, the consequences should not be underestimated either. Having fewer options to save money for a rainy day is a serious problem. Additionally, there may be a hidden tax increase, as taxpayers may be pushed into higher brackets. This is far from ideal but often a necessary option for governments to prevent the shift from inflation to hyperinflation.

Social Changes Become Apparent

During a period of inflation, the average behavior of consumers will evolve in different ways. First of all, the hoarding of goods will become more outspoken.This has been apparent during the first COVID-19 wave, which made people hoard toilet paper and other products. The same will happen once inflation starts to make its mark on any economy. 

Second, it is possible there will be a lot more social unrest. When things don’t go well financially, lashing out is a rather predictable outcome. Ranging from protests to actual revolutions, inflation has triggered it all in the past. It may even do so in the future, assuming things will ever become so dire. 

Labour Adjustments

Although this particular consequence isn’t necessarily negative at first, it will not always be positive either. During inflation, the nominal wages are unlikely to be adjusted immediately. Real wages, on the other hand, are more likely to be subjected to a correction sooner rather than later. The people who have work are still more likely to try and keep their job at all costs, instead of hopping between positions like they do normally. 

Unfortunately, the rate of unemployment is also likely to rise alongside it. Inflation affects people’s wages, and if there isn’t sufficient incentive to go to work, people will prefer staying home to cash their unemployment checks. Until the gap between real wages and nominal wages stabilizes, the unemployment rate is likely to keep rising. Far from an ideal situation, which is why inflation needs to be kept under control at all times. 

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