even if
output prices rise at the same rate as costs. Of critical importance is the degree of net working capital as a proportion of
the overall financing required, the higher the net working capital the greater being the impact of inflation on capital
spending.
Finally, it would appear that corporate financial behavior is influenced by inflation. Inflation will cause the firm to
reduce its capital budget, to attempt to reduce net working capital, and to alter the debt/asset ratio using short term debt,
thus driving up short term rates relative to long term rates.