Pros and Cons Of inflantion by Anugrah rizky and Angga boy
The Government have an inflation target of CPI 2%. This suggests they would rather have moderate inflation than no inflation at all.
Advantages of inflantion
Deflation is potentially very damaging to the economy and can lead to lower consumer spending and lower growth.
For example, when prices are falling, consumers are encouraged to delay purchasing in the hope prices will be cheaper in the future.
A moderate inflation rate reduces the real value of debt. If there is deflation, the real value of debt increases leading to a squeeze on disposable incomes.
Moderate rates of inflation allow prices to adjust and goods to attain their real price.
Moderate rates of wage inflation, allow relative wages to adjust.
Nominal wages are sticky downwards. With moderate inflation, firms can freeze pay rises for less productive workers – to effectively give them a real pay cut.
Moderate rates of inflation are a sign of a healthy economy. With economic growth, we usually get a degree of inflation.
Disadvantages of inflantion
High inflation rates tend to cause uncertainty and confusion leading to less investment. It is argued that countries with persistently higher inflation, tend to have lower rates of investment and economic growth.
Menu costs, This is the cost of changing price lists.
Inflation and stagnant wage growth lead to declining incomes.
Inflation can reduce the real value of savings, which might particularly affect old people who live on savings. However, it does depend on whether interest rates are higher than the inflation rate.
What the type of inflantion?
When looking at the pros and cons of inflation, it is important to consider what type of inflation is occurring.
Cost-push inflation may only be temporary (due to raising taxes). Therefore, this is only a one-off problem and not as serious than deeply embedded inflation ( due to wage inflation and high inflation expectations)
However, cost-push inflation does tend to reduce living standards (short-run aggregate supply is shifted left). Cost-push inflation is also difficult to deal with because a Central Bank can’t both reduce inflation and increase economic growth at the same time.
Also, it depends on whether the inflation is anticipated or not. If inflation is much higher than anticipated then many people, especially savers are more likely to lose out.
Advantages of inflantion
Deflation is potentially very damaging to the economy and can lead to lower consumer spending and lower growth.
For example, when prices are falling, consumers are encouraged to delay purchasing in the hope prices will be cheaper in the future.
A moderate inflation rate reduces the real value of debt. If there is deflation, the real value of debt increases leading to a squeeze on disposable incomes.
Moderate rates of inflation allow prices to adjust and goods to attain their real price.
Moderate rates of wage inflation, allow relative wages to adjust.
Nominal wages are sticky downwards. With moderate inflation, firms can freeze pay rises for less productive workers – to effectively give them a real pay cut.
Moderate rates of inflation are a sign of a healthy economy. With economic growth, we usually get a degree of inflation.
Disadvantages of inflantion
High inflation rates tend to cause uncertainty and confusion leading to less investment. It is argued that countries with persistently higher inflation, tend to have lower rates of investment and economic growth.
Menu costs, This is the cost of changing price lists.
Inflation and stagnant wage growth lead to declining incomes.
Inflation can reduce the real value of savings, which might particularly affect old people who live on savings. However, it does depend on whether interest rates are higher than the inflation rate.
What the type of inflantion?
When looking at the pros and cons of inflation, it is important to consider what type of inflation is occurring.
Cost-push inflation may only be temporary (due to raising taxes). Therefore, this is only a one-off problem and not as serious than deeply embedded inflation ( due to wage inflation and high inflation expectations)
However, cost-push inflation does tend to reduce living standards (short-run aggregate supply is shifted left). Cost-push inflation is also difficult to deal with because a Central Bank can’t both reduce inflation and increase economic growth at the same time.
Also, it depends on whether the inflation is anticipated or not. If inflation is much higher than anticipated then many people, especially savers are more likely to lose out.
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