Inflation can erode the purchasing power of money from "summary" of The Economics of Money, Banking and Financial Markets, eBook, Global Edition by Frederic S. Mishkin
Inflation is a persistent increase in the overall level of prices in an economy. When prices rise, each unit of currency buys fewer goods and services. This means that the purchasing power of money is reduced as inflation erodes the value of money over time. For example, if the inflation rate is 2% per year, then a basket of goods that cost $100 this year will cost $102 next year. This implies that the same amount of money can buy less in the future than it can today. Therefore, inflation can be seen as a tax on holding money because it reduces the amount of goods and services that can be purchased with a given amount of money. The erosion of the purchasing power of money can have significant implications for individuals, businesses, and the overall economy. For individuals, inflation means that their savings will buy less in the future, reducing their ability to maintain their standard of living. Businesses may also suffer as their costs increase due to rising prices, potentially leading to lower profits and reduced investment. Moreover, inflation can distort economic decision-making by making it difficult to distinguish changes in relative prices from changes in the overall price level. This can lead to misallocations of resources and inefficiencies in the economy. Additionally, inflation can create uncertainty about future price levels, making it harder for individuals and businesses to plan for the future.- The erosion of the purchasing power of money due to inflation is a crucial concept in economics that has wide-ranging implications for individuals, businesses, and the economy as a whole. It is important for policymakers to understand the causes and effects of inflation in order to implement appropriate measures to mitigate its negative consequences.
