Inflation is indeed an extremely debated topic in economics. There are different points of view stating that it is just a phenomenon that drags the economy down – making everything harder and riskier.
Inflation is usually described as the sustained rise in prices of goods and services in a certain country. Its triggering point is – the value of money falls. If the prices of things keep on increasing and is making everything more difficult, then, is it something to be really dreaded about?
Or does it bring its own benefits, too?
Inflation is actually good for the economy
In cases that the economy is not running fully due to deflation (i.e. rise in unemployment and unused resources), inflation can help turn the tables. When the economy has been stuck in a period of recession, a higher rate of inflation can help it recover, thus, boosting its economic growth.
Moreover, when the prices of goods and services are falling (deflation), people are becoming unwilling to spend their money since they are thinking that prices can get cheaper sooner or later, hence, it leads them to delay purchases. If this happens, it can have an adverse domino effect to demand, then affecting production, distressing employment rate which may further lead to layoffs, and worst, a weakening and failing economy.
On the other hand, inflation boosts consumption. If you know that items are more likely to rise by 2-3% in a year, then you can be urged to purchase it now since buying it after some time can most likely increase its price.
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essentially increases wages
If the price of goods and services continue to increase in the market, employers find it easier to adjust and increase wages. In turn, employee productivity increases since there is an increase in the workers’ morale. Rise in wages can be attributed to inflation.
Inflation is a great help to people with current debts and are repaying their loans. With inflation peaking, wages of people can increase fast as well. To put it simply, loan payments become less valuable since it is taking a smaller portion of a person’s income. Quite the reverse of deflation or falling of prices – it actually intensifies the value of loans.
A good example is the United States, which is known as the leading debtor in the world, inflation helps reduce the impact of its massive debt.
favorable if it is 2-3% a year
Economists argue that a little does of inflation is vital to promote economic growth and to stabilize the economy. The considered healthy rate is 2-3% per year. As examined in this article, it can still be considered positive since it can result to wage growth. It can also lead to profitability of businesses due to a continued flow in their capital.
Inflation is a constructive phenomenon as long as the factors being considered such as employment, business growth, and wage concerns are moving up altogether in unison.
Read also about the events you need to anticipate in the economic calendar.
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