Inflation is a general increase in prices and fall in the purchasing value of money. It impacts various aspects of the economy, leading to different types of costs incurred by consumers and businesses.
Shoe Leather Cost
Shoe leather cost refers to the costs associated with minimizing the holding of cash during times of inflation. When prices rise, individuals and businesses realize that holding onto cash is not beneficial since its purchasing power diminishes. To avoid losing value, they may frequently withdraw money from the bank or make more trips to the store. This leads to wear and tear on shoes and more time spent managing monetary values, hence the term ‘shoe leather cost’.
Menu Cost
Menu cost is the cost incurred by firms when they change their prices. The term originated from the restaurant industry, where businesses literally have to print new menus when they adjust their prices. In an inflationary environment, the need to frequently change prices can lead to significant administrative expenses, including printing costs, consumer communication, and potential customer dissatisfaction as prices fluctuate more often.
Unit of Account Cost
Unit of account cost refers to the difficulty in determining the true value of goods and services when inflation is high. Inflation causes money to lose its effectiveness as a measure of value, making it challenging for people and businesses to keep track of prices over time. This can lead to inefficiencies in the market as individuals may struggle to make informed economic decisions, ultimately affecting budgeting, pricing strategies, and long-term investments.