Does inflation have no effects on the economy if it is anticipated?

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Posted on (Answer #1)

In general, inflation does not have any consequences for the economy if it is anticipated.  This is because people can plan for the inflation.  Since the value of money is, to some degree, an arbitrary thing in the first place, there is no harm done if the value of a certain nominal amount of money changes so long as people know that the change is going to occur.

One of the main problems associated with inflation is the transfer of wealth from one group to another.  For example, if inflation occurs and workers do not get higher wages, wealth is essentially being transferred from workers (whose pay does not rise) to employers (who are able to charge higher prices for the goods the workers make).  This sort of thing can cause problems for an economy.  If, however, the inflation is anticipated, these effects do not occur.

If there is an effect of anticipated inflation, it is largely positive.  For example, if there is anticipated inflation at a fairly low level, people will often feel more prosperous.  The inflation will increase the nominal value of their wages.  This will make them feel richer and will help cause more economic activity.

Overall, then, anticipated inflation has little impact on an economy and what impact it has is generally positive.

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