Inflation and deflation
Effects of inflation
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The effects of inflation depend on:
The cause of inflation
Demand-pull inflation is likely to be less harmful than cost-push inflation. Demand-pull inflation is associated with rising output whereas cost-push inflation is associated with falling output.
The rate of inflation
A high rate of inflation is likely to cause more damage than a low rate. Situations of hyperinflation usually accompany a major economic collapse featuring high unemployment and a major decrease in the production of goods and services.
Whether the inflation rate is accelerating or stable
An accelerating inflation rate, and indeed even a fluctuating inflation rate, will cause uncertainty and may discourage firms from undertaking investment.
Whether the rate is the one that has been expected
Unanticipated inflation, which occurs when the inflation rate was different from that expected, can also create uncertainty and so can discourage some consumer expenditure and investment.
How the rate compares with that of other countries.
It is possible for a country to have a relatively high rate of inflation but if it is below that of rival trading partners, its products may become more internationally competitive.