If inflation is 5% per year, something that he could buy for one hour’s labor in January will cost him $10.50 in December, but he hasn’t gotten his raise yet, so in effect if prices rise rapidly the employee is always a year behind. Plus, like all games of “musical chairs” eventually the music stops and someone is left without a seat.Later in the inflation cycle, businesses will find it harder to take out a loan, because banks and other financial institutions view a business with a low cash flow as a risk, since it’ll be harder to pay back the borrowed funds. With very low inflation in Europe, this means they have to cut prices and cut wages which cause lower growth (due to the effects of deflation). In the long term, this reduces business growth preventing businesses from taking advantage of market opportunities.One of the major costs of doing business for most companies is employee wages. However, most Central Banks target an inflation rate of 2%, suggesting that low inflation can have various advantages to the economy. This first effect of inflation is really just a different way of stating what it is. This is the most obvious impact to businesses. If the ECB had been willing to target higher inflation, then we could have seen a rise in Eurozone GDP.Inflation is usually considered to be a problem when the inflation rate rises above 2%. They figure that because inflation rates are rising, the cost (in purchasing power) of paying the loan back will be less than the value of the loan taken out. When inflation rises materially above the federal target, investor confidence in the economy is reduced. Over time, that employee will start to struggle financially, because their dollar counts for less than it once did. pensioners) lose out because the their real incomes fall; Effects of Inflation on Businesses. For simplicity sake, suppose an employee is earning $10 per hour. When replacement inventory costs more than the inventory you just sold, it can lead to inventory shortages. 4. Very quickly that employee would quit coming to work. And GE was desperate for funding after Bear Stearns and Lehman Brothers went belly up. Some economists even argue we should target a higher inflation rate during periods of economic stagnation.For example, the Eurozone has had a very low inflation rate in 2013-14, and this has corresponded to very weak economic growth and very high unemployment. This is because they want compensation for the increased risk of lending money. Inflation can boost growth. There are ways for businesses to plan for inflation to reduce the chances of revenue loss. At this point, in order to protect themselves against the impact of inflation, lenders increase interest rates to cover not only the cost of the depreciating value of the money, but also the cost of increased market uncertainty. If the Eurozone had moderate inflation, it would be easier for southern Europe to adjust and regain competitive without resorting to deflation. Inflation can be especially painful for small businesses. More than 99-percent of all companies in the United States are classified as small businesses. Traditionally high inflation rates are considered to be damaging to an economy. However, in a modern economy, this kind of hyperinflation is rare. Positive effects: Industry-wide price rises enable revenues to grow
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