What are the long-term effects of inflation on investment and economic growth?
Answer (1)
In the long run, inflation affects investment and economic growth by creating uncertainty. When inflation is high or unpredictable, it becomes difficult for businesses, investors, and even consumers to plan for the future. This uncertainty leads to fewer investments, lower productivity, and slower economic growth.Let’s say a Filipino entrepreneur wants to build a factory. If he knows that prices for materials, labor, and loans might change drastically due to inflation, he may delay or cancel the project. Likewise, foreign investors may avoid countries with unstable inflation because they fear losing money due to currency value changes.Another long-term problem is the distortion of spending and saving behavior. If people expect inflation, they tend to spend quickly instead of saving. This lowers the amount of money available in banks for lending to businesses, which weakens capital investment.High inflation also erodes purchasing power over time. A family that used to buy a week’s worth of groceries for ₱1,000 may only get half as much food if prices double. This affects living standards, especially for people with fixed incomes or low wages.On the flip side, mild and stable inflation (like 2% per year) is helpful. It encourages people to spend rather than hoard cash, which keeps the economy active. It also gives businesses room to raise prices and earn profits, which they can reinvest.The key is balance. In the Philippines, the BSP tries to maintain stable inflation because it supports business confidence, job creation, and investment. When inflation is low and predictable, both local and foreign investors feel safe investing in the country. Over time, this leads to stronger economic growth and a better quality of life for Filipinos.
