Tuesday, August 3, 2010

Is Inflation Bad?

I have always had the concept that inflation is bad.

Recently, I dug up my old school textbook on Economics and started to read it and realised that there are actually pros and cons to inflation and that aiming for zero inflation might actually be a bad thing. Here are some of the things that I learnt:

Reducing inflation is said to require a period of high unemployment and low output. In addition, the cost of reaching zero inflation is large. When inflation is zero, the lost output translates to lost income and this does not fall proportionately across the entire population. Instead, the workers who lose their jobs are the ones who actually pull down the aggregate income. These workers are often the ones who are lower skilled and have the least expertise. At the end, the cost of a zero inflation policy is borne by the ones who can least afford it.

So do you think inflation is good or bad? The answer is actually not that simple and a huge debate is still ongoing....

7 comments:

  1. If you are rich, you are less affected by inflation or defaltion or whatever. So the answer can be simple. Are you rich?

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  2. Hi FF,

    I think whether inflation is good depends on whether your wage inflation is higher than goods/services inflation. If yes, then of course it's good.

    It's all relative.

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  3. Let be realistic when you are a salaried employee.

    Your wage increase is unlikely to overtake inflation rate as bosses will likely to increase your wage just high enough not for you not to quit or adjust the entry level salary high enough to hire someone to replace you if you decided to quit.

    Don't expect your bosses to care how inflation is affecting you as they are in business to make money for themselves.

    High inflation are generally bad for ordinary working class.

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  4. Unfortunately, not all of us can be bosses. Otherwise, we can all keep the money for ourselves. Bosses can lose their pants. Employees only lose their jobs. So don't envy them.

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  5. I remember reading Alan Greenspan "The Age of Turbulance" in which he said that compared to zero-inflation, inflation is better for the government because inflation pushes property prices up. When that happens, the people will be happy because they are "richer" and in turn, the government will get more support.

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  6. Inflation is "good" as long as your real wage also grows. I do not know how we are affected psychologically when we see our property prices go up. But I guess it is a valid point to make.

    I think individually, bosses cannot decide at what wage to keep their workers' salary at. With inflation, market forces will determine what the wage should be.

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  7. Inflation is only good if your increased wages are able to cope up with the increased inflation, else its an evil. But i guess not everyone is able to cope up with increased inflation, so its not good in any respect.

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