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The effects of inflation
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High or unpredictable inflation causes problems for consumers, workers, businesses and the whole economy.
Prices, wages and exports
Prices: money buys less; people on fixed incomes and savers lose out.
Wages: workers demand higher pay, which can push costs and prices up further (a wage-price spiral).
Exports: if prices rise faster than abroad, exports become less competitive, which may increase unemployment.
Wages: workers demand higher pay, which can push costs and prices up further (a wage-price spiral).
Exports: if prices rise faster than abroad, exports become less competitive, which may increase unemployment.
Costs for businesses
Menu costs: the cost of changing prices, such as reprinting menus, price lists and labels.
Shoe-leather costs: the time and effort of shopping around for the best price or moving money to earn more interest.
Shoe-leather costs: the time and effort of shopping around for the best price or moving money to earn more interest.
Uncertainty and investment
Unpredictable inflation creates uncertainty, reducing business and consumer confidence.
Firms find it hard to plan, so they may invest less, which slows growth.
Low and stable inflation helps confidence and planning.
Firms find it hard to plan, so they may invest less, which slows growth.
Low and stable inflation helps confidence and planning.
A restaurant must reprint its menus every month because of rising prices. What cost of inflation is this?
- Changing price lists costs money.
Answer: Menu costs
Inflation reduces what money buys, can trigger wage demands, makes exports less competitive, creates menu and shoe-leather costs, and reduces confidence and investment.
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