How costly is inflation?

Answer 1

Inflation can be very costly, and is generally exponentially increasing in cost as it increases linearly. Most economists believe that inflation over 10% a year in an economy would be disastrous in the long-run. Here are the three main sources of cost due to inflation:

1) Shoe-leather costs, which are incurred due to individuals having to move to spend or use money more often, since money is more valuable when first received than it will be later.

2) Menu costs, which are incurred because firms have to adjust their prices and resources listing their prices (and this requires time and effort).

3) Redistributional costs, which are incurred on account of economic agents changing the distribution of their assets as the value of money itself changes.