Everyone is trying to stay ahead of perceived economic threats and instabilities by raising the risk premiums that they demand from their clients. The psychological underpinnings and bearings of inflation have been studied deeply in the last few decades. It is the source of the uncertainty that remained obscure. My hypothesis is that the end of every economic cycle fosters this panicky uncertainty which is monetarily reflected as inflation. In more technical terms, inflation is a market pathology, a market failure.
Inflation disguises bad economic performance of firms and of the economy as a whole.
Paper profits make up for operational losses. The incentives to innovate, modernize, and enhance productivity suffer. Economic yardsticks and benchmarks get distorted and do not allow for meaningful analysis of the performance of the economy. Inflation leads to technological and economic stagnation. Plants do not modernize, the financial aspects of the firm s operations are emphasized, the industrial and operational aspects de-emphasized and neglected.