Chronic Inflation is a phenomenon which is characterized by the rise in price for a prolonged period of time. This rise in price is not the ordinary price rise instead it rises at a much higher level. The inflation records a hike of 10%-30% in the industrialized and developed countries. In some developing countries it often reaches 100% which is alarming .
As the term suggests 'Chronic Inflation' tends to become chronic. The inflation stretches for a long span of time and recurs often due to certain reasons. This type of inflation has a tendency to become permanent and eat away into long-term investments. Once the inflation begins, the period seems to be never ending. The prices continue to rise at an abnormal rate causing economic distortions and negative expectations pile up.
Effects of Chronic Inflation
- Chronic inflation interrupts normal economic activities. When people anticipate this kind of inflationary situation they start buying goods from the market to avoid purchasing goods in an even higher price.
- Investors are scared to invest for long-term purposes hence the short-term investments increase.
- The analysts become busy involved in assessing the market risks and market speculation begins. The businesses go through heavy losses. But to avoid being bankrupt they concentrate on small and short term investments, they concentrate on acquiring savings and insurance policies.
- The pension schemes, long-term bond schemes suffer due to the non friendly atmosphere.
- The most harmful effect of chronic inflation is that it erodes away the potential for future investments, it reduces the purchasing power of people.
Measures Adopted to Combat Chronic Inflation
The government also has to deal with a lot problems in such a hostile condition. The export activities suffer in the competitive world market. They have to deal with a great number of disadvantages driving them to resort to protectionism and whimsical currency control measures.
When the level of inflation reaches its acme it causes hyperinflation which leads to grave circumstances like the break down of the whole economy.