Effects+of+Inflation

=Effects of Inflation = Inflation benefits some people but it affects most negatively. It causes changes in:
 * the purchasing power of the dollar
 * the value of real wages
 * interest rates
 * saving and investing
 * production costs

** Decreased Purchasing Power **
 * The decreasing value of the dollar particularly hurts people on fixed incomes
 * As the value of the dollar falls, the purchasing power of people who rely on set pension checks or other fixed income decreases as well
 * To combat this problem, many labor contracts, government benefits, and retirement plans include cost-of-living adjustments (COLAs). COLAs automatically raise wages or payments to account for inflation.

** Decreased Value of Real Wages ** Increased Interest Rates **
 * Inflation reduces the value of workers' real wages when pay increases fail to keep pace with rising prices
 * However, wages tend to stay ahead of or at the pace of inflation
 * As prices increase, interest rates (the price of borrowing money) tend to increase as well
 * <span style="color: #000000; font-family: 'Lucida Sans Unicode', 'Lucida Grande', sans-serif;">High interest rates can decrease consumer spending - particularly on goods that are usually purchased on credit or through loans (i.e. computers, cars, houses)
 * <span style="color: #000000; font-family: 'Lucida Sans Unicode', 'Lucida Grande', sans-serif;">High interest rates can double or even triple consumers' monthly credit card or loan payments

<span style="font-family: 'Lucida Sans Unicode', 'Lucida Grande', sans-serif;">** Decreased Saving and Investing **
 * <span style="font-family: 'Lucida Sans Unicode', 'Lucida Grande', sans-serif;">Inflation affects the return that people receive from their savings and investments
 * <span style="font-family: 'Lucida Sans Unicode', 'Lucida Grande', sans-serif;">If inflation is running at a higher rate than the interest you earn on your savings, you lose money overall

<span style="font-family: 'Lucida Sans Unicode', 'Lucida Grande', sans-serif;">** Increased Production Costs **
 * <span style="font-family: 'Lucida Sans Unicode', 'Lucida Grande', sans-serif;">Businesses that issue long-term bonds with interest rates lower than the inflation rate benefit from inflation
 * <span style="font-family: 'Lucida Sans Unicode', 'Lucida Grande', sans-serif;">However, high inflation hurts most businesses because inflation increases their costs of production [[image:dollar_avatar_tiny_square.jpg align="right" caption="HOME" link="home"]]