How is inflation viewed as a sign of progress in the economy?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Inflation is not a completely good thing for an economy.  Central banks try hard to avoid letting inflation rates get too high.  They also do not want inflation rates to be unpredictable.  Even so, there is at least one way to say that it is a good sign when there is inflation in an economy.

Inflation can be a good sign for an economy because it can mean that the economy is “heating up.”  In other words, it can mean that aggregate demand is rising.  When an economy is doing poorly, consumers do not want to buy as much as when the economy is doing well.  When people do not want to (or are unable to) buy things, aggregate demand drops.   This prevents prices from rising and can even make them fall in extreme circumstances.  By contrast, when the economy is good, and people’s incomes and confidence are rising, aggregate demand increases.  This can cause inflation.  In this way, inflation can be a sign that an economy is growing and that people are feeling wealthy and confident enough to buy more things.

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