The Rise and Fall of Nations: Ten Rules of Change in the Post-Crisis World

by Ruchir Sharma

Inflation discourages savings, because it erodes the value of money sitting in the bank or in bonds, in turn shrinking the pool of money available to invest. Eventually, high inflation will force the central bank to take action by increasing the price of money through higher interest rates, which will make it more expensive for businesses to expand and for consumers to buy homes and cars; as a result, the growth boom will stall. When inflation is very high—say, in the double digits—it also tends to be volatile, dropping suddenly or accelerating into hyperinflation, adding new hurdles to growth in the economy. In an environment where prices are prone to wild swings, businesses find it difficult to get financing for their projects and also can’t be confident of the likely return on their investments. If businesses are afraid to build new supply networks or improve old ones, those networks continue to fall short of meeting demand, which keeps driving up prices. The economy then becomes permanently inflation prone.