Inflation isn't costly just because prices are going up. After all, inflation means salaries and wages are going up as well. If higher prices are not the problem, discuss two important aspects of inflation that are costly

Answer 1

One important cost of inflation is that it can frustrate the intent of long-term contracts. Since inflation cannot be predicted with certainty, unanticipated inflation will alter the terms of long-term contracts such as mortgages, pensions, and bonds. Also, inflation causes real resources to be used by consumers in an attempt to protect themselves from inflation's harmful effects. These resources would otherwise be available for production, and the inflation, therefore, reduces our production possibilities. A third danger of inflation is that it can distort the information delivered by prices. When relative prices are changed by inflation, it can cause decision makers to make decisions they will later regret.