Project report on inflation

Disadvantages of Inflation :-

• High inflation rates tend to cause uncertainty and confusion leading to less investment. It is argued that countries with persistently higher inflation, tend to have lower rates of investment and economic growth. 

• Higher inflation leads to lower international competitiveness, leading to fewer exports and a deterioration in the current account balance of payments. In a fixed exchange rate, e.g. the Euro – this is even more problematic as countries do not have the option of devaluation. 

• Menu costs. – This is the cost of changing price lists. 

• Inflation and stagnant wage growth lead to declining incomes. 

• Inflation can reduce the real value of savings, which might particularly affect old people who live on savings. However, it does depend on whether interest rates are higher than the inflation rate. 

• Inflation will reduce the real value of government bonds. Investors will demand higher bond yields to compensate; this will increase the cost of debt interest payments 

• Hyper-inflation can destroy an economy. If inflation gets out of hand, it can create a vicious cycle, where rising inflation, causes higher inflation expectations, which in turn pushes prices even higher. Hyper-inflation can wipe out the savings of the middle-classes, and redistribute wealth and income towards those with debt and assets and property. 

• Costs of reducing inflation. To restore price stability, Governments/Central Banks need to pursue deflationary fiscal/monetary policy. However, this leads to lower aggregate demand and often a recession. The cost of reducing inflation – is unemployment, at least in the short-term. 

Hedging against Inflation:-

An inflation hedge is a financial instrument designed to safeguard a currency's buying power against a loss of value caused by rising prices, either macroeconomically or due to inflation. It usually entails purchasing an asset with the expectation of maintaining or increasing its value over a fixed length of time. Alternatively, the hedging might entail taking a larger stake in assets, which may depreciate at a slower rate than the currency's value.

How Inflation Hedging Works:

Hedging against inflation can help safeguard an investment's value. Certain assets may appear to offer a good return, but after inflation is taken into account, they might be sold at a loss. For example, if you invest in a stock that returns 5% but inflation is 6%, you will lose 1% of your investment. Inflation-hedging assets may be self-fulfilling in that investors flock to them, keeping their prices high despite the fact that their actual worth may be significantly lower.
When the dollar loses value due to inflation, gold, for example, tends to become more costly. As a result, an owner of gold is protected (or hedged) against a declining dollar since, as inflation rises and the value of the currency erodes, the cost of each ounce of gold in dollars rises. As a result, the investor gets rewarded for the inflation by receiving more dollars per ounce of gold.