Why inflation is a good thing
Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Understanding Inflation. Types of Inflation. What Does Inflation Impact? Understanding Hyperinflation. Understanding CPI. Related Terms A-I. Related Terms J-Z.
Economy Economics. Key Takeaways Inflation, in the basic sense, is a rise in price levels. Economists believe inflation comes about when the supply of money is greater than the demand for money.
Inflation is viewed as a positive when it helps boost consumer demand and consumption, driving economic growth. Some believe inflation is meant to keep deflation in check, while others think inflation is a drag on the economy. John Maynard Keynes said that some inflation helps prevent the Paradox of Thrift—delayed consumption.
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El Banco en Colombia. Why is it essential to have a low and stable inflation rate? This is manifested in various ways: A low inflation rate promotes the efficient use of productive resources.
When inflation is high, a substantial quantity of individual people's time and resources from the economy are invested in searching for mechanisms to defend themselves from inflation.
Thus, for example, when inflation is high, businesses have to channel more resources into portfolio management in order to avoid financial losses. This is an inefficient use of productive resources that do not generate wealth to society. A low inflation rate reduces uncertainty. It has been observed that economies with high inflation also suffer from a more variable type of inflation. Uncertainty can have negative effects on expected profits from investment and, therefore, negative effects on long-term growth.
Greater uncertainty also implies uncertainty with regard to relative prices, to the extent that there is a loss in price informative content for future prices and increase in trade margins. For example, a bond is essentially an IOU with interest. Someone holding a low-interest bond or CD with a year or longer time horizon may be stuck with a paltry return and watch from the sidelines as other investors jump into higher-yielding bonds.
On the other hand, a homeowner who locked in a fixed mortgage at a low interest rate is in a good position — their home value would likely inflate but their monthly loan payments would stay the same. Rising inflation may also be a challenge for seniors, especially those on a fixed budget who get most of their income from investments.
One silver lining: Those who get the bulk of their income from Social Security are well-situated, since those monthly payments grow with the cost of living. Americans who are still working may also receive a cost-of-living raise in their paychecks to reflect rising prices, Benz said.
Relative to investments, bond mutual funds and exchange-traded funds offer some additional flexibility, according to Lassus. Holding individual bonds, especially those with a term longer than seven years, is likely not a good idea for investors worried about inflation, she added.
Stock funds don't offer a direct inflation hedge, but have historically outrun inflation by a comfortable margin over the long term, Benz said. Skip Navigation. Key Points. Inflation is here. They also give employers the flexibility not to increase wages by as much as inflation, but still offer their staff some sort of rise.
In a world of zero inflation some companies might be forced to cut wages. That would not be good for morale, recruitment or productivity. For most of the last five years inflation has been running ahead of wage rises, but thanks to inflation, wages have also been rising, even if the money doesn't go as far. It would dearly love to see that eroded by inflation, which in turn would see its own income rise.
As long as there's a good dose of inflation in the system, tax revenue should go up, even if the economy is stagnant. When inflation is too high of course, it is not good for the economy or individuals. Inflation will always reduce the value of money, unless interest rates are higher than inflation. And the higher inflation gets, the less chance there is that savers will see any real return on their money.