Inflation is a persistent and widespread phenomenon that has a significant impact on economies and financial markets around the world. Many people believe that inflation is one of the most harmful economic problems that a country can face. Inflation works against the long-run economic growth of a country by making consumers gradually poorer. It also erodes the value of the currency since the purchasing power of the monetary unit decreases over time. Given the persistence of inflation and the way it can play out over the course of decades, many people wonder if there is such a thing as “good” inflation. If not, what kind of inflation should a country target?
In this article, we will be exploring the concept of “good” and “bad” inflation and its relevance to the modern world. We will also be outlining the differences between the two and outlining the pros and cons of pursuing “good” or “bad” inflation.
What is Inflation?
Inflation is the rise in the general price level in a country over a period of time. It can be a sustained, long-term phenomenon or a short-term phenomenon that takes place over the course of months or years.
Inflation is a result of an increase in the quantity of money in an economy, which in turn leads to an increase in the price of goods and services.On a monetary level, inflation is caused by an increase in the money supply, which results in a less valuable currency.
What is Bad Inflation?
Bad inflation is when a country experiences very high inflation rates for prolonged periods of time. The most damaging type of inflation is hyperinflation, which occurs when a country experiences an inflation rate of more than 10^8% per month.
The damages of hyperinflation are primarily economic. Consumers can’t effectively manage their money, employers can’t compensate workers with pay raises and salary cuts become the norm. Businesses are forced to let go of employees and reduce production to try and stay afloat.
What is Good Inflation?
Good inflation is when inflation rates are comfortably low, but the central bank is actively increasing the money supply. In practice, this means that the official inflation rate is lower than it would be without the injection of new money into the economy.
The Fed in the United States is a good example of conducting good inflation. Since the Great Recession, the Fed has been purchasing a large amount of government debt and mortgage-backed securities to try and boost economic growth and lower unemployment rates.
Can Inflation Be Good for the Economy?
Yes, inflation can be beneficial to an economy. The central bank can control inflation by raising or lowering interest rates. If a country experiences high inflation, then interest rates can be increased to slow down the rate of increase in the price of goods and services. If a country experiences low inflation, then interest rates can be decreased to boost consumption and investment.
In the end, the debate on “good” and “bad” inflation has little merit. Economists and financial experts agree that inflation is harmful to an economy, but they disagree on exactly how harmful inflation is. The important thing to remember is that inflation is a natural economic phenomenon that will occur during the course of any economic expansion. What is important is how a country reacts to inflation and if it can prevent the harmful effects of inflation from becoming a problem.