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What Is Written Here Is Not Investment Advice. It has been published on this page to explain the terminology used with explanations about the stock market, digital currencies, economy, finance and investment instruments.

🔍Inflation Costs

Inflation is the continuous increase in the general price level of goods and services in an economy. High inflation leads to various costs for both producers and consumers. Let's examine what these costs are and how they can be reduced.

The costs of inflation include:

- Loss of purchasing power: Inflation means a decrease in the value of money. That is, less goods and services can be bought with the same amount of money. This negatively affects consumers' living standards. For example, if a person who can buy a loaf of bread with 10 TL has to pay 15 TL due to inflation, his purchasing power will decrease by 33%.

- Depreciation of securities: Inflation reduces the real return of fixed income securities (such as bills, bonds, deposits). That is, if the interest or rental income from these securities is lower than the inflation rate, investors lose in real terms. For example, a person who deposits $100 at 10% interest will receive $110 a year later. However, if the inflation rate is 15%, that person's purchasing power drops to 95 TL. In this case, investors want to sell securities or look for alternative investment vehicles.

- Increase in production costs: Inflation also increases the prices of factors of production (such as labor, capital, raw materials). This increases the costs of the producers. Manufacturers have to reflect this cost increase on their prices or reduce their profit margins. Increasing prices can reduce demand and lose competitiveness. Reducing profit margins can reduce investment and employment opportunities.

- Deterioration of income distribution: Inflation may increase the differences between income groups. Especially those with fixed incomes (such as pensioners, civil servants, workers) are more affected by inflation. Because their income increases or stays the same at less than the inflation rate. In contrast, those with variable incomes (such as employers, self-employed, speculators) can more easily adapt to inflation and increase their incomes. In this case, inequality in income distribution may occur.

- Economic instability: Inflation creates uncertainty and insecurity in the economy. Both producers and consumers can delay their decisions about the future or make wrong decisions. For example, producers may avoid investing or engage in speculative activities. Consumers, on the other hand, may give up saving or turn to consumer goods. In this case, economic growth and employment are negatively affected.


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