Inflation is the number used to measure how prices of goods and services are going up over time. But can inflation be good for the economy?
What Causes Inflation?
Producers and customers contribute to inflation due to their economic activities. Regarding producers or firms, inflation can be caused by increased production costs such as raw materials and wages. When it comes to customers, they usually trigger inflation due to an increase in demand for certain products or services. Other causes of inflation include sabotage by foreign players who might mismanage the economic trend of a country and then cause inflation. There are also poor economic policies, especially in dictatorship countries whereby the economy is dominated by monopolies organizations that control national resources. Lack of viable competition in an industry empowers financial players to play around with the currency and end up hiking prices to abnormal levels. Governments are also blamed for causing inflation through printing and giving away more money to citizens until the streets are flooded with money [Source]. Other administrations tend to devalue legal tender and make it almost obsolete on the global market. An increase in public spending is another common cause of inflation witnessed in our modern world, where people are chasing after a luxurious life. Other factors are population growth, hoarding, exports, and deficit financing of government spending.
How does Inflation generally affect the Economy?
Inflation directly affects the economy, and in most cases, it negatively affects the economy. Inflation financially affects producers and consumers. Consumers’ spending ability can be negatively reduced if inflation is allowed to soar to greater heights. Producers might be tucked out of business by increased production costs and incur many losses if their customers can no longer buy their products or acquire services. A locality’s legal tender is not spared by inflation, and it can hit hard to the extent of dissolving the currency’s buying power. Inflation extends to business investment, interest rates, taxes, government spending, employment and unemployment rates, wages and salaries, and national policies. Inflation has the power to dictate a country’s GDP and economic performance while denoting the livelihood of the public. In many countries, it is described as an anti-progressive entity that hinders economic growth.
Can Inflation be Good for the Economy?
Contrary to popular, inflation can be good for the economy, and this depends on the current state of a specific economy. Inflation enables debtors to clear out their debts using less valuable cash than when they borrowed it. High inflation is also profitable to producers since they can sell their products or services at hiked prices and reap many profits [Source]. This will motivate firms to produce and increase supply on the market. With increased production, the employment rate will increase as firms look into hiring more labor, so unemployment tends to decrease. Investors also benefit through incentives if they invest in a particular organization. Inflation has been used to flash out local tender by making it obsolete and bringing in foreign currency, which usually carries high value in an economy.
How can Moderate Inflation be Good for the Economy?
Moderate inflation means that inflation is kept at ‘normal’ levels, so it does not rain down negative economic effects. Such inflation is good since it can increase consumers’ demand for products and services and increase producers’ production [Source]. This means that supply is increased, and firms will be able to make profits and stay in business. More so, increased production leads to labor demand, lowering unemployment rates, and many people will receive wages or salaries. Thus, creating a public that can spend more and promoting the buying power of legal tender.
What is a Good Inflation Rate for a Country?
A good inflation rate for a country is pegged at 2% or below [Source].
How does Inflation affect businesses?
Inflation can be either good or bad for a business, depending on its level. Some businesses are strong enough to survive high inflation, especially those which sell basic goods or services such as medical treatment equipment and retail food shops. Such organizations can enjoy profits in a high inflation environment, which creates high demand, and they will be able to increase their prices. They will increase production and hire more labor to enhance the supply and keep up with the demand. But small firms or those businesses which sell luxurious stuff suffer a lot because inflation causes customers to chase after basic goods and abandon inferior products. Most businesses of this nature eventually lose out since they cannot afford the cost of production needed.