Costs and benefits of inflation

Monetary policy has considerable lags, and, therefore, is likely to have difficulty affecting inflation over such a short horizon as one year or less. It is argued that countries with persistently higher inflation, tend to have lower rates of investment and economic growth. This made it easier for the government to pay back their debt, but it means investors lose out.

In a similar vein, Nobel laureate James Tobin noted that such inflation would cause businesses to substitute investment in physical capital plant, equipment, and inventories for money balances in their asset portfolios.

The analyst should then apply a common unit of monetary measurement to all items on the list, taking special care not to underestimate costs or overestimate benefits.

So now I understand what inflation targeting is, but what are its costs and benefits? The changes afoot were publicized, albeit under the cover of academic theories.

However, adjustments for differential inflation are not often done in practical analyses, both because the future is uncertain and because such refinements are often seen as unlikely to influence the decision among the alternatives being considered.

For example, when prices are falling, consumers are encouraged to delay purchasing in the hope prices will be cheaper in the future.

The Cost of Unemployment to the Economy

This results in higher costs of doing business and place an overall drag on the economy. But in the meantime they tend to spend the "excess". The general argument was that changing relative costs of goods would result in consumer substitution of less-expensive goods for more-expensive goods.

General[ edit ] An increase in the general level of prices implies a decrease in the purchasing power of the currency. Thus the impact of the project on cotton production in the U.

When they stopped outside a shop, the money was left but wheelbarrow stolen! Inflation can reduce the real value of savings, which might particularly affect old people who live on savings. It is imperative that the discount rate be consistent with the treatment of inflation.

If future costs and benefits follow the common practice of being expressed in terms of "real" "constant" dollars, then discount rate should be the "real" interest rate.

In an early example, the government mandated the use of a gasoline formulation that purportedly would improve auto emissions.

This computation is equivalent to placing an economic value on the expected number of lives saved. Principles of Cost Benefit Analysis One of the problems of CBA is that the computation of many components of benefits and costs is intuitively obvious but that there are others for which intuition fails to suggest methods of measurement.

In the 19th century the banking schools had greater influence in policy in the United States and Great Britain, while the currency schools had more influence "on the continent", that is in non-British countries, particularly in the Latin Monetary Union and the earlier Scandinavia monetary union.

In the wake of the collapse of the international gold standard postand the move towards deficit financing of government, RBD has remained a minor topic, primarily of interest in limited contexts, such as currency boards.

Therefore, bondholders saw a fall in the real value of their bonds. Inflation and stagnant wage growth lead to declining incomes. The marginal benefit will decline with the amount consumed just as the market price has to decline to get consumers to consume a greater quantity of the commodity.

With financial markets effectively euthanized, the remaining goods and physical asset prices would move in perverse directions. It may take some trial and error to find a discount rate such that the funds required for the projects with a positive net present value is no more than the funds available.

A conservative approach with a conscious effort to avoid any subjective tendencies when calculating estimates is best suited when assigning a value to both costs and benefits for a cost-benefit analysis. Anticipated and unanticipated inflation If inflation is unanticipated e.

This is not valid for several reasons. A dollar available five years from now is not as good as a dollar available now.

Cost-Benefit Analysis

The controversy is defused when it is recognized that the benefit of such projects is in reducing the risk of death. Maintaining a constant-standard-of-living means being able to consume the same goods in the same quantity, without having to trade-off living quality versus price, being able to buy needed gasoline, for example, without having to cut back on food quality.

The result is a loss of allocative efficiency. The Way It Was Measurement of consumer inflation traditionally reflected assessing the cost of maintaining a constant standard of living, as measured by a fixed-basket of goods.

Whatever the percentage change was in the cost of that basket of goods, that is how much income would have to rise in order for someone to maintain a fixed- or constant-standard of living over the given period.The fact that not all central banks that state price stability among their goals of monetary policy have chosen an inflation targeting framework is indicative of the fact that it is not clear whether the benefits of inflation targeting exceed its costs.

Costs and Benefits of Inflation Inflation reduces the purchasing power of money and imposes costs on different groups. Unanticipated inflation erodes the real value of workers' wages, savers' deposits, and consumers' disposable income.

Cost of borrowing: High inflation may also lead to higher borrowing costs for businesses and people needing loans and mortgages as financial markets protect themselves against rising prices and increase the cost of borrowing on short and longer-term debt.

There is also pressure on the government to increase the value of the state pension and unemployment benefits and other welfare payments as. 2 HealthView SECTION 1: INTRODUCTION HealthView Services’ Retirement Health Care Costs Data Report shows retiree health care expenses will.

Caution. Data in archived news releases may have been revised in subsequent releases.


The latest data, including any revisions, may be obtained from the databases accessible on the program homepages. Archived News Releases. PROBLEMS WITH INFLATION ESTIMATION.

This public comment updates No. —Public Comment on Inflation of May 15,reviewing the nature of inflation understatement by the U.S. government’s statistical agencies and the rationale and approach used by in compiling the ShadowStats Alternate Consumer Inflation the following text includes new material.

Costs and benefits of inflation
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