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Monetary Policy - Inflation - Costs

Further work

In this section we look at a few other areas of economic theory that you may want to consider when studying the costs of inflation.

Fiscal drag - one of the costs of inflation is the distortions to the tax system that it causes. Indirect taxes are often fixed amounts and so inflation erodes the value of them. Hence the fact that they are raised in every budget! Another potential distortion of the tax system caused by inflation is fiscal drag.

Hyperinflation - a key concern when there is high inflation is the danger that it may turn into hyperinflation. This is where inflation starts to run at rates of thousands of percent.