Quick Answer: What Happens When Inflation Is Too High?

Higher inflation will raise the cost of living.

The impact on workers depends on what happens to nominal wages.

For example, if inflation is caused by rising demand and falling unemployment, firms are likely to raise wages to keep attracting workers.

In this case, workers real wages will continue to rise.

Is high inflation good or bad?

When inflation is too high of course, it is not good for the economy or individuals. Inflation will always reduce the value of money, unless interest rates are higher than inflation. And the higher inflation gets, the less chance there is that savers will see any real return on their money.

What happens if inflation is too low?

Low inflation can be a signal of economic problems because it may be associated with weakness in the economy. When unemployment is high or consumer confidence low, people and businesses may be less willing to make investments and spend on consumption, and this lower demand keeps them from bidding up prices.

What are the effects of rapid inflation?

Cost of borrowing: 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.