The relation between Investment and Inflation

 

Financial experts, economist, policymakers all have one thing on their mind does inflation reduce the investment? Well, there is a fair share of analysis been done to prove it has and it does not, the retired people are the most hurt during the phase of the situation when the demand exceeds the supply of goods, thus creating a price increase and push in the cost of production. Being monetary phenomena, it often presses the government to circulate more paper currency to combat and come out of the whirlpool of inflation.

It’s relation to investment

  • with rising prices, people, in general, are unable to buy as much as they could earlier, resorting to either put the additional money which is not used to buy the goods in other avenues like investing them or try to procure the goods at the high prices if they are absolutely essential and perishable goods
  • savings are generally discouraged as money is not worth what it was prior to inflation, making an investment, to save not absolutely necessary
  • the expectation from all sectors reduces the economic boost to maintain a level of investment and increase the investments for the economy to bounce back and function for growth
  • businesses find it a tough path to plan for the future as several of their projects would be on hold due to a steep rise in prices
  • it is difficult to decide how much to produce as the demand for the product cannot be predicted in the rising price situation to cover their costs accordingly
  • it disrupts the operation of financial institutions and markets, discouraging their integration with other global markets
  • there is a high amount of uncertainty in the future prices, the interest rates and exchange rates which could discourage trade and financial investments would not be economically viable

The risk associated with investments is high during inflation and production activity of industries at large. Individuals may be reluctant to enter into contracts as how much the relative pricing would be affected by inflation will be ambiguous. Overall negativity sets in the industry as an investment is either directly or indirectly affected, making the nominal value uncertain, making it difficult to plan investments for fixed income groups. The most common way, during the inflationary period, is that investments inhibit the economic growth, the trust on the demand and supply of money is affected as investors rethink on making financial decisions due to unpredictable rise in prices.