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Normally inflation means the increase of the general level of price of the goods and the services over a period of time. General meaning of the "inflation" also imply that we must consider about it, because increasing the price level of the goods are directly affect to our daily routings, rise the price of goods means that buyer will go for fewer goods than normally he is buying this implies that this has decrease the purchasing power of that buyer, The effect of inflation is not goes evenly, and as a result there are disadvantages to some and benefits to others from this decrease in purchasing power As an examples 1. Lenders or depositors who are paid a fixed rate of interest on loans or deposits will lose purchasing power from their interest earnings, while their borrowers benefit, 2. Some institutions that have cash assets will experience some difficulties due to decrease of purchasing power of their holdings, 3. If we are running a business and there are workers who earn fixed salaries we may have to increase their payments The above things happened under normal inflation situation and this inflation may course negative and positive effects that should be considered Negative effects of inflation There are high or unpredictable inflation situations that harmful to an overall economy, should be consider carefully, because in these situations inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Inflation can act as a disturbance factor on productivity, and companies may force to shift resources away from products and services in order to focus on profit and losses from currency inflation. There is a uncertainty about the future purchasing power of money that discourages investment and saving. And inflation can impose hidden tax increases and if this inflation is going in a one economy sometimes badly affect on its exports goods that will take more expensive, because as an example there is high inflation in our country and we export tea, rubber and coconut and due to the high inflation rates we export our goods at a high price but it will reject in the world market, in addition to these bad effects following negative impacts may take a place Cost-Push inflation Employees can demand higher wages due to rising inflation, to keep up with consumer prices. Rising wages in turn can help fuel inflation. In the case of collective bargaining, wages will be set as a factor of price expectations, which will be higher when inflation has an upward trend. Inflation begets further inflationary expectations Harding People tend to buy consumer durables as stores of wealth in the absence of viable alternatives as a means of getting rid of excess cash before it is devalued, creating shortages of the hoarded objects Allocative efficiency When prices are constantly changing due to inflation, there is not a constant price for a goods and due to the price change, sellers and agents are slow to respond to market need of goods. The result is a loss of allocative efficiency Menu Cost With high inflation, to increase the costs of goods firms must change their prices often. But often changing prices is itself a costly activity, as with the need to print new menus, or implicitly, and publicity of goods under new price also take place Positive effects of inflation Debt relief Debtors who have debts with a fixed nominal rate of interest will see a reduction in the "real" interest rate as the inflation rate rises. The "real" interest on a loan is the nominal rate minus the inflation rate For example if someone take a loan where the stated interest rate is 8% and the inflation rate is at 4%, the real interest rate that he is paying for the loan is 4%. And now that if he had a loan at a fixed interest rate of 6% and the inflation rate increased to 20% he would have a real interest rate of -12%. Banks and other lenders Room to maneuver The primary tools for controlling the money supply are the ability to set the discount rate, the rate at which banks can borrow from the central bank, and open marker operations which are the central bank's interventions into the bonds market with the aim of affecting the nominal interest rate. If an economy finds itself in a recession with already low, or even zero, nominal interest rates, then the bank cannot cut these rates further (since negative nominal interest rates are impossible) in order to stimulate the economy A moderate level of inflation tends to ensure that nominal interest rates stay sufficiently above zero so that if the need arises the bank can cut the nominal interest rate Tobin effect Moderate level of inflation can increase investment in an economy leading to faster growth or at least higher steady state level of income. This is due to the fact that inflation lowers the return on monetary assets relative to real assets, such as physical capital. To avoid inflation, investors would switch from holding their assets as money (or a similar, susceptible to inflation, form) to investing in real capital projects The above mentioned factors are the effects (negative or positive) that occurred due to the inflation therefore need to consider inflation economic decisions to have the advantages of economic inflation and to avoid losses Learn More about Construction Economics -http://www.helpmydegree.info/Construction Economics.html Construction Technology-http://www.helpmydegree.info/Technology.html If you need more information relevant to construction industry visit http://www.helpmydegree.info
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