Investment lags because long-term commitments involve risks that inflation makes incalculable. The need to guard against these unknowable risks compels each party to any transaction, buyer and seller, employer and employee, lender and borrower, to introduce a risk premium into his pricing. Each must demand a little more or offer a little less than he would under noninflationary conditions. That reduces the range of possible bargains and the level of economic activity. Fewer jobs and less output in the private sector are the results.
Inflation also undermines the honesty of our public policies.
It allows the politician to make promises that cannot be met in real terms because, as the government overspends trying to keep those promises, the value of the benefits it delivers shrinks. Finally, inflation becomes a means of promoting changes in our economic, social and political institutions that circumvents the democratic process. Such changes could be forced upon a reluctant nation because inflation may end up making the existing system inviable. One instance is the diminishing ability of households to provide privately for their future. Personal savings, insurance and pension funds all become inadequate.