Effects of High Inflation Rates, High Inflation Rates Explained

Wednesday, August 13, 2008

Effects of High Inflation Rates

Increasing inflation usually denotes slowing of economy as prices for food, commodities and services rise and the currency weakens. Some of the most prominent effects of inflation are noted here.

Increase in costs – you have to pay more for edible products, energy commodities, transports, etc. This price increasing effect will be significant for imported goods like oil and gas.
Loans becoming costlier – most loan rates will go up, so you have to pay more for your vehicle and home loans.
Decrease in returns from investments – When adjusted for inflation, fixed bank deposits and mutual fund returns yield low returns (or even negative returns). This mainly negatively affects persons who seek monthly returns from their investments.
Decrease in total portfolio value – Increasing inflation rates negatively affects stocks, as it challenges growth of companies. The result is the decrease in total portfolio value.
High taxes – governments may impose higher taxes for keeping the money flow or to support weaker parts of the economy.
Cut down in working costs by companies – To ensure survival or progress of ongoing projects, companies may reduce their working costs. Results include fewer allowances and annuities, and drop in parties and travels.
Slow infrastructure growth – Governments, companies and persons can postpone or stop infrastructure development projects.