Inflation Can Be Good For Economy

When the prices increase people despair but economist may not react to inflation in the same way. Inflation may have some positive outcomes as well and surprisingly, countries consider this factor while designing their annual budgets and expenditure plans.

The most important aspect is that the government and banks conduct all their financial business on the basis of funds and if the inflation is in the negative then the rate of interest also goes down. This will lead to a liquidity trap. Some inflation is required to motivate people to work harder to earn more money and thereby affect the market and lending and borrowing rates.

Why do bankers not like falling inflation

When inflation is high, people still buy the essential services and goods. For example, food, medicines, and fuel are essential items. Now if the inflation goes down and the prices of essential items go down then people can afford to buy more non-essential items like vehicles, clothes and other stuff. This makes sense but it is not what really happens in the real world.

The negative impact of reduced inflation

People will wait for prices to fall further and keep postponing important purchases and inventories will start piling on. This will have a direct effect on the production and manufacturing industry and many people may end up being jobless and without money even though the prices are low.

Even otherwise if the prices are constant or keep decreasing, then the employers may not be able to increase the salaries and other bonuses etc. given to the employees. This will also lead to discontent among them and an unhappy bunch of society. People want more money so that they can buy more varieties of things. They have moved beyond the simple living style of an old generation. People today want newer things and that cost money. With fewer wages and maybe joblessness, due to less demand in the market people will lose the buying power completely. The economy may go into a spiral.

Effect on debt

Deflation or reduced inflation will also encourage people to hoard the money that they have. They will not get good rates of interest in the market or from investing in financial institutions. This will further reduce the amount of money in the market for use by people and institutions.

Inflation reduces the debt taken by people and governments as the amount of money in circulation increases and the rate of interest remains the same at which the debt was taken. So people can pay off their loans when their wages increase and governments also find it easy to get rid of their debts.So we can conclude that some amount of inflation is critical to keep the economy working smoothly and positively.