The Fourteen NCEA Level 2 Impacts of Inflation

What is overarching inflation impact that affects households

Households experience a decrease in purchasing power as prices rise, making it more challenging to afford goods and services.

First effect of inflation on households:

Those on fixed income (e.g. retired, disability etc.) now have a less powerful income. They face increased difficulty in meeting their essential needs due to rising prices.

Second effect of inflation on households:

Income distribution becomes warpedas inflation affects different income groups unevenly, leading to greater inequality.

Third effect of inflation on households:

Savings are discouraged, as the real interest rate has decreased, which means households would have a relatively lower return. Individuals will have less money for emerganices AND will demand less for larger capital goods (house, car, etc.)

Fourth effect of inflation on households:

Real assets (house, gold etc…) become more valuable as they rise with the general price level.

Fifth effect of inflation on households:

Borrowers are better off on average as higher wages on average mean they will have more money to pay back on their (lower in real terms) loans.

First effect of inflation on Firms:

Investment is more risky and difficult as it is more difficult. Firms need to pay/borrow more for capital, so investment spending will decrease.

Second effect of inflation on Firms:

Planning becomes more difficultdue to uncertainty about future price levels, making it harder to set long-term strategies and budgets. Business confidence will decrease.

Third effect of inflation on Firms:

Larger businesses (who have more capital goods which real value is increased due ot inflation) are better off. Their net value has increased.

The effect of inflation on trade.

There are less exports, as New Zealand goods/services are now more expensive, while there are more imports, as overseas goods/services are now relatively cheaper. That means there is more likely to be a trade deficit.

The first effect of inflation on Government Spending

Government spending must increase on governments services (e.g. healthcare, education etc.) as they are now more expensive to maintain.

The Second effect of inflation on Government Spending

Those on social security benefits payed for by the government (e.g. disability income, superannuation etc) may demand an increase to maintain their purchasing power of income which could increase government spending.

The first effect of inflation on Government Revenue

The price of goods and services in the economy are now higher, which means that the government is a higher revenue on GST.

The Second effect of inflation on Government Revenue

During inflation, wages increase, which means the government would have a higher income tax revenue.

The effect of inflation on a Government Budget

Because the government is now making a higher revenue than before AND the economy is (or almost) at capacity (during high inflation), they can choose to spend less on government projects (e.g. infrastructure and choose to use their excess money to payback government debt.