Negative effects of inflationary growth on the economy

Of course, just as how there are two sides to every coin, similarly, there are pros and cons to inflationary growth as well. Although inflationary growth and inflation does have their fair share of benefits, there are also many things that they bring about that can instead be harmful to both the economy and the country.

Firstly, uncertainty. Uncertainty in the future can lead to a decrease in aggregate demand and hence a decrease in investment. As people are unsure about the future, they tend to save more and spend less, leading to decreased demand.  A recent survey by AVIVA showed that 30% of Singaporeans were less willing to spend during times of inflationary growth.

 If inflation is rapid enough, in fear of unaffordable prices, there may even be shortages and goods being hoarded. For instance, in 2008, after Johor stopped Singaporeans from buying cooking oil from Malaysia, there was a shortage of cooking oil in Singapore as thousands of Singaporeans scrambled to buy and stock up on cooking oil in anticipation of price hikes.

Similarly, aside from causing a decrease in purchasing power per unit of currency, increased inflation can also result in increasing costs of production and a further decrease in aggregate demand. All of this leads to an even higher cost of investment for firms which worsens the problem of high inflation rates.

Furthermore, in the Singaporean context, with continued growth in inflation and no growth for wages in the middle income groups over a sustained period of time, inflation can even result in the widening of the social and income gap between different classes of Singaporeans. This issue is worsened by the increased demand and hence increase prices of housing in Singapore. In a survey by the Straits Times, Singaporeans have also been shown to be most concerned about both inflation and housing prices as well.