How does inflation affect our economy?
The consequences of inflation can be categorised into two areas: output effects and redistribution effects. 1. Output effects: Continual price rises lead to uncertainty about the future (particularly when inflation rates are high, or where there is a wage-price spiral), and thus making decision-making more difficult for consumers and the business sector. Investment decisions become more risky in an inflationary environment because uncertainty about future costs and prices makes it difficult for decision-makers to be certain about the rate of return which can be earned on investment. If inflation leads to higher risk on capital expenditure, then it must lead to lower output and employment opportunities. Capital-for-labour substitution can occur if wages rise faster then productivity. Rising costs have been responsible for other structural changes in the economy. In Australia, for example, the oil shocks of the 70s resulted in greater emphasis on energy-saving techniques of production an
