Inflation hurts households the most because it limits their purchasing power and makes it difficult to buy the items needed for day-to-day living. Interest rates also rise as a result of inflation, which can make it harder to obtain the financing required to purchase a home or vehicle. Households living on fixed incomes can often suffer the worst effects of inflation because they can't keep up with rising prices by earning more income.Continue Reading
Inflation also affects retirement portfolios and causes some investors to take greater risks in their investment strategies in an attempt to "keep up." If the strategy doesn't pay off, the investor can possibly be left in worse shape than they were in before. Education, and the increased earning power that comes with it, can also be affected by inflation when students can't afford to go to college.
In certain extreme cases of inflation, shortages may occur if and when consumers begin hoarding goods out of fear of price increases. A redistribution of purchasing power is another possible effect of inflation, since those households with variable incomes continue to spend while fixed-income households hold back.
With respect to an overall economy, unpredictable inflation can make it difficult for companies to formulate long-term plans or budgets. Market and production inefficiencies can also be caused by high inflation rates. Production levels and output quality in manufacturing companies can decline if inflation rates cause management to place a greater amount of attention on profit and loss than on resources and quality assurance.Learn more about Economics