Inflation question (1 Viewer)

[sunjet]

It says an effect of inflation is that high inflation will lead to more spending and less savings, wouldn't it do the opposite? Anyone care to explain.

Thanks

 

[monique66]

In a nutshell what this means is that there will be more short term consumption. This is because if consumers feel there is likely to be a rise in inflation in the future they will spend more in the present. This leads to a disallocation of resources as they are moved away into less productive areas. For example, if a family feels that inflation is likely to rise they will by a house now rather than later. This means that money that could be spent in other areas is reallocated in less efficent areas.

Hope that helped

 

[ando_88]

i agree with the above, but another factor is that people will save less because the real rate of return from savings (i.e. interest) will decrese as inflation increases.

In other words those with savings in the bank will be recieving less return as inflation rises in real terms, unless ofcourse interest is indexed to inflation which it is not...

 

[sunjet]

thanks, just wording was weird in my book.