Question

why is inflation a problem ? give three reasons.

Answer 1

Before discussing why is inflation a problem lets first discuss what inflation is

Inflation : Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.

To put it simply, inflation is the long term rise in the prices of goods and services caused by the devaluation of currency.

Now why inflation is a problem / negetive effects of inflation

1) Now during inflation prices of everything will rise suddenly whether it is grocery items, medical care, prescribed drugs, rent, clothes etc everything will rise in terms of price but the problem is that the paycheck which the person will recieve will be same as the salary will not change and if it increases it will not increase according to inflation so in a nutshell a person will be trying to pay for the increased costs of items on the same income, so inflation can be tough on the wallet .

2)Many people borrow money from a lender at some point in their lives whether it’s in the form of a student loan consolidation, car loan or a mortgage. And when inflation rises, the Federal Reserve might take it as a cue to increase rates for banks.
In simple terms, high inflation may also lead to higher borrowing costs for businesses and people needing loans and mortgages as financial markets protect themselves against rising prices and increase the cost of borrowing on short and longer-term debt.

The bottom line is that higher inflation means higher interest rates on the money you borrow — and less money in your pocket.

3)For investors who count long-term, conservative investments as a significant part of their net assets, inflation can be a dirty word. This is because these traditionally safe investments, like bonds, often require investors to lock into a guaranteed rate for a long time. Inflation creates a situation where these long-term investments that pay a low interest rate have decreased buying power because inflation pushes up the price of goods and services.
So Investing in long term assets would be useless as interest rate will be low and the money invested for a long time will lose its purchasing power as compared to previous. so long term investment is not good in inflation.