Consequences of Inflation

Inflationary times signal a growing economy and shrinking unemployment. However, when inflation gets to be too high, it can cause a recession or, in extreme cases, a depression. For this reason, the Fed will loosen monetary policy when it believes the economy is too tight in an attempt to avoid any long-term slowdown.

Economists generally agree that inflation is bad for the economy. Over time, inflation diminishes value, including the value of money. If the inflation rate were 10%, prices would double in only seven years.

Individuals with fixed incomes feel the effects of inflation the most. Retirees who depend upon pensions based on salaries when money was worth more will be able to buy less each year. Because inflation undermines value, a $50 yearly interest payment one year will be able to purchase less than it did the year before.