When inflation is out of hand, it can undermine the financial system and the economy as a whole.
Businesses can’t anticipate the cost of raw materials, the cost of labor, or the domestic or international prices for their goods and services. So they don't know what price they will have to charge to make a profit — or whether they can make a profit at all. In the worst case scenario, they may be forced out of business by cheaper imported goods or declining demand.
Faced with this uncertainty, businesses will not risk investing in new equipment or spending money on research and development. They may shift their operations to countries where there’s less inflation.
When people are uncertain about future inflation, they withdraw their assets from banks. And because they have no confidence in what their money will buy tomorrow, they exchange it for a more stable currency or convert it into things of enduring value — land, gold, art, and the like. But they don’t invest in the new equipment or new technologies that are necessary for economic growth.
Anthony Santomero,
Federal Reserve
Bank of Philadelphia
Germany in 1923
Following World War I, the German
mark suffered severe
hyperinflation.
What one mark bought in 1918 cost 726,000,000 marks
in 1923, only five years later. It was cheaper to
burn marks than to use them to buy the wood needed
to keep a house warm. Within hours, prices would double,
and a single loaf of bread could cost a household
its entire savings.
Businesses can’t anticipate the cost of raw materials, the cost of labor, or the domestic or international prices for their goods and services. So they don't know what price they will have to charge to make a profit — or whether they can make a profit at all. In the worst case scenario, they may be forced out of business by cheaper imported goods or declining demand.
Anthony Santomero, 