Positive and negative impacts of inflation on households

Positive and negative impacts of inflation on households • • Negative Loss of purchasing power as real income is declining. Decline in real value of savings as less future purchases can be made. Not everyone can demand a pay rise and can not avoid the loss of purchasing power. Fixed incomes do not rise with lost purchasing power as easily as skilled workers. Positive • Workers can ask for pay rises to compensate inflation that may be larger than inflation e. g. inflation 2% but get 5%. • Household borrowing debt loses purchasing power so over time the debt is less in future as the income used to pay is greater than the initial debt

Positive and negative impacts of inflation on firms Positive • If inflation is low compared to other countries global competitiveness can improve which can benefit through increased exports. • E. g. if Australia has inflation of 4% and NZ 2%, then goods made in NZ may be cheaper for Australians to purchase, so exports may increase. Negative • Increase in costs of production due to workers demanding higher wages or raw materials prices increasing due to scarcity (in a boom) and less resources available. • Planning and investment becomes difficult due to uncertainty in prices and competitiveness. • Exports become too expensive abroad so demand declines.

Winners Losers Mortgage holders Young people saving for a house Credit card holders Retired people living on savings Hire purchase Savers planning a holiday holders or trip Skilled or in high Benefit holders e. g. Dole, demand workers sickness, DPB, superannuation Workers in sunrise Unskilled workers industries

Impacts of inflation on different groups Saving for savers • Saving will decline even thou interest rates increase to fight inflation. • The purchasing power of money declines so it is better to spend than save so consumption increases and saving declines. • $ in the bank will buy less in the future so spend it now before it losses more value. Borrowing for those with debt • The debt will lose purchasing power in the future like any savings so becomes less of a concern. • Incomes rise to fight inflation so it becomes easier to service the debt in the future. • Borrowing can be encouraged during periods of inflation even thou interest rates are rising due to the losing PP.

Impacts of inflation on different groups Investors in Property • Inflation leads to people investing in housing as houses gain in value whereas the loan on them loses its purchasing power. • In periods of inflation people increases investment in property or artwork, or tangible goods like gold rather than store money in a bank. Investors in capital goods • Inflation leads to business uncertainty due to rising prices affecting business planning and costing's. • Firms are less willing to borrow for investment in capital goods as the risk of business failure increases with inflation as profit margins can be reduced.

Impacts of inflation on different groups Fixed income people • People who are on a set income like benefits or low income earners do not gain immediate pay rises regularly to compensate for inflation. • Therefore purchasing power is declining so the ability to maintain their life style decreases and gap between rich and poor grows. People with high education levels or skills in demand • People who can demand pay rises do not lose purchasing power but can maintain their life style and use inflation as a reason to gain additional income. • They will benefit from inflation for borrowing and see incomes raise over time.

Impacts of inflation on different groups Industries – Sunrise • An industry where demand is growing for the goods will be able to increase prices to maintain profit margins. • As demand is increasing prices can be increased to accommodate inflation. • As consumers will just pay more for the product to get the goods and services. Industries - Sunset • An industry where demand is declining for the goods and services, so to increase the price to maintain profit margins is not likely. • Consumers will not pay additional increases in price so if firms raise prices to accommodate inflation they will lose sales revenue and the business will fail.

Impacts of inflation on different groups Exporters • As local costs increase like raw materials, wages and electricity firms become less competitive abroad as they must increase prices to maintain profits. • As price increases quantity demanded abroad decreases. • As inflation increases exports decline so x-m declines. Importers • With increasing inflation imports become cheaper than domestic made goods so consumer that are price conscious will buy more imports. • Inflation will cause imports to increase so (x-m) decreases.

Business cycle • The business cycle shows changes in the economy based on changes in Gross domestic product which can be affected by inflation and other factors like C + I + G + X-M. • As any factor increases the economy increases GDP so moves upwards to a boom. As the economy reaches peak and costs rise with inflation the economy moves to a downturn. As the GDP changes the economy moves through the business cycle.

Effects of inflation 1. Explain a positive effect of increasing inflation on households. 2. Explain a negative effect of increasing inflation on firms. 3. Compare and contrast the groups based on the impacts of inflation on each. • Savers and borrowers • Exporters and importers • Fixed income earners and property investors

Business cycle 1. Draw a diagram showing the business cycle and fully label each time period. 2. Define the following: 1. 2. 3. 4. Recession Recovery Trough Boom 3. Explain the differences between the stages.

Compare and contrast using the business cycle why it changes over time. • Compare and contrast how different stages of the business cycle affect inflation. • Refer to all stages on your graph • Link your answers to the business cycle and MV=PQ.