Why is inflation considered good?

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brettd's profile pic

brettd | High School Teacher | (Level 2) Educator Emeritus

Posted on

Inflation can also be considered "good" as an economic indicator, although in some circumstances it is a bad economic indicator as well.  But some inflation means that the economy is healthy, that demand for goods and services is steady and that manufacturing sectors are humming along to keep their shelves stocked, and place orders to factories for those goods.  All of these are positive things for an economy.

There is a threshold, however, when inflation becomes harmful to an economy, and takes away from real income and therefore consumer spending.  This is why the Federal Reserve closely controls interest rates, so that inflation can be kept at a reasonable and manageable level.

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

Inflation is not considered to be good in general.  It is considered good for at least one part of the population, however.

Inflation is good for people who are in debt.  If you are in debt, the money that you repay is worth less than the money that you borrowed.  If there is enough inflation, you actually end up paying back less real money than you borrowed.  But this is really the only segment of the population that is helped by inflation.  People who lend money and people who save money are actually harmed by inflation.  In addition, the economy as a whole is harmed if there is too much inflation.

krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted on

Inflation in economics refers to general increase in price levels in an economy or a country. It is not true that inflation is considered to be good in itself. All that we can say is the it is not possible to have rapid economic development without some inflation also occurring side by side.

However inflation is not necessarily an indicator of development of an economy or greater prosperity of people. Often inflation can be so steep that it can hamper the economic development rather than help it.

Inflation has greater adverse effect on people with fixed income such as pensioners. Even salaried people are often affected adversely by inflation as usually their salaries do not keep pace with the inflation.

Inflation can also hurt the economy of a country by making its exports costlier for buyers. Similarly it makes imports more attractive. This is the reason for recent increase in outsourcing by highly developed countries like the USA.

william1941's profile pic

william1941 | College Teacher | (Level 3) Valedictorian

Posted on

Inflation is the phenomenon when the prices of goods increase and we can buy lesser of something with the same amount of money. According to James Tobin, who won the Nobel Prize in Economics, this may have a good affect on the economy. If there is a moderate inflation people find that the value of the money they have is going to decrease over time. So instead of keeping the money idle with them, they invest it. This could be either by depositing the money in a bank, buying stock or investing the money in a company or procuring more of the goods that in the future would be costlier to buy. These results in an increase in the money invested for capital formation. And hence is beneficial for the growth of the economy.

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