The expenses incurred when individuals and businesses reduce their holdings of money due to inflation are known as shoe leather costs. These expenses arise as economic actors take steps to minimize the erosion of purchasing power caused by rising prices. For example, individuals might spend extra time and effort comparing prices across different stores to find the best deals or make more frequent trips to the bank to withdraw smaller amounts of cash to avoid holding large sums that are losing value.
Understanding these costs is significant because they represent a real economic burden associated with inflationary environments. While often less substantial than other consequences of inflation, such as menu costs or distortions in investment decisions, they reflect a tangible loss of productivity as resources are diverted from productive activities to managing cash holdings. Historically, societies experiencing hyperinflation have witnessed a dramatic increase in these costs as individuals desperately seek ways to preserve the value of their assets.
