In the extreme case of hyper- inflation, a foreign currency, for example the United States dollar, effectively becomes the measure of value and even the means of exchange. High inflation also distorts the allocation of resources and often directs the efforts of entrepreneurs and investors into hedging operations, instead of productive activity. High inflation discriminates against the fixed salaried workers, pensioners and low-income people that cannot protect themselves sufficiently against the erosion in the value of money. In the global economy, where the markets for capital, goods, services and also labour get more integrated, countries with high inflation are punished severely. Finally, if a country, or at least its central bank, is not permanently on guard against a decline in the value of its currency, the ever-present inflationary forces in the economy will almost inevitably lead to a gradual escalation in the rate of inflation until it gets completely out of control.
Inflation is to an important extent a monetary phenomenon.
It is for this reason that the fight against inflation, at least as far as the Reserve Bank is concerned, is aimed at controlling the money supply. Inflation, however, has many causes, some of which fall completely outside of the influence or control of the central bank. Inflation can, for example, be imported because of rising prices in the rest of the world. Inflation can be caused by excessive increases in Government expenditure, particularly if financed through the banking system. It can also be caused by real wage increases in excess of productivity rises, and by monopolistic price exploitation.