BANKING AFFAIRS

Detailed explanation-1: -Erodes Purchasing Power An overall rise in prices over time reduces the purchasing power of consumers, since a fixed amount of money will afford progressively less consumption. Consumers lose purchasing power whether inflation is running at 2% or at 4%; they just lose it twice as fast at the higher rate.

Detailed explanation-2: -A higher inflation target could increase uncertainty and costs in the economy. A lower inflation target, on the other hand, is costly to achieve. For example: The reduction in growth in spending and investment required to keep inflation at a lower target would lower output growth and increase unemployment.

Detailed explanation-3: -Because of higher debt rates, a downstream effect of higher inflation is a slower economy. During inflationary periods, prices are higher, and it is more expensive to incur debt. For these two reasons, companies often sell fewer products and the economy slows.