Inflation affects the price system the way static electricity affects AM radio signals. If business managers misread prices, then they are apt to misallocate resources and capital. Resource misallocation refers to producing too much or too little because of misreading the true relative price of the good being produced. Resource misallocation reduces the efficiency of production and the profits earned by firms. Capital misallocation also occurs.
Firms invest in new factories that later prove to be unprofitable.
They are then forced to close the plants and write off losses. Huge amounts of savings are wasted during inflationary periods as firms enter into projects that they would recognize as unprofitable were price signals not obscured by inflation. Transaction costs increase. Shoeleather costs refer to the costs of engaging in more financial transactions as the cost of holding less money. Since money loses value during inflation, people economize on their holdings of money.