High and variable inflation can harm long term growth.4 High and variable inflation generates considerable uncertainty for individuals and businesses, hindering their willingness and ability to plan and contract over the long term. Businesses have differing abilities to change their prices in response to inflationary shocks.
As some businesses change prices and others do not, it becomes difficult to distinguish a generalised increase in prices from a shift in relative prices when the inflation rate itself is variable. Unexpected inflation acts as a hidden tax on financial investment for savers, yet reduces the real interest burden of debt for borrowers.