Inflation also does long-term damage to the economy. When money doesn't hold its value, businesses and investors have more difficulty making contracts, especially where contracts have to last over time, eg employment contracts and borrowing. This discourages long-term, quality investment in the nation's productive capacity. Inflation was high during the 1970s and the 1980s, peaking at 18.4 per cent per annum in 1980. Since 1991, inflation has been low and stable.
Expectations can affect inflation, at least in the short term.
Similarly, if wage earners think that inflation will rise, they may push for higher wage settlements. With inflation having been low for almost a decade, people will be more likely to assume that inflation will stay low when making pricing or purchasing decisions. The flip side of inflation is deflation , when average prices are falling. Deflation can harm the economy too, as it can induce its own distortions, such as people putting off spending because they expect prices to fall. This, if it gets out of control, can cause a rapid economic slow-down.