Although a small amount of inflation can be seen as a good thing (by reducing the size of
debts in
real terms), it is usually viewed as negative due to the following
costs:-
Shoe-leather costs - If costs are unstable, consumers are more likely to shop around to find out what is to be considered a reasonable price. This use of time is an opportunity cost.
Menu costs - A restaurant will have to spend money upgrading it's menus to the increased prices. This is especially expensive with vending machines.
Pschological and political costs - If prices rise, people feel worse off, even if their wages are rising above the level of inflation. History suggests that periods of change and revolution (e.g. Nazi Germany) coincide with times of high inflation.
Redistribution costs - Income is often redistributed in periods of high inflation. Anyone on a fixed income suffers from inflation - in the UK many pension schemes give fixed returns. It is often hard for government to keep per unit taxes in line with unexpected inflation.
Unemployment and growth - Inflation is linked to increased unemployment and low growth by monetarists. It increases the costs of production and creates uncertainty. Therefore less businessmen are prepared to risk investment and thus growth is reduced.