Definition
Shoe-leather costs are the time, effort, and resources households and firms spend reducing their cash balances when inflation makes holding money expensive. The name comes from a vivid image: in a high-inflation economy, people make frequent trips to the bank to withdraw small amounts and reinvest the rest, literally wearing out their shoes.
The cost is real even though it is hard to see. Cash held in a wallet earns no interest, so when prices rise quickly, idle money loses purchasing power every day. People respond by economizing on money holdings — and that economizing itself consumes valuable resources.
Why it matters
How it works
The opportunity cost of holding money equals the nominal interest rate, which moves with expected inflation. As inflation climbs, that foregone interest grows, so people hold less cash and make more frequent, smaller financial transactions. Each extra trip, transfer, or conversion uses time and bank resources that could have produced something else.
Economists count this lost productivity as a genuine cost of inflation, alongside menu costs and the distortion of relative prices. It is one reason central banks treat price stability as a core objective.