The rate of inflation varies from country to country, yet, every country is facing inflationary tendencies. The question to be addressed now is that is inflation atrocious for an economy, and is it responsible for imposing an extra burden on household’s budgets.
A Different Stand for inflation
We are right to think that inflation causes various problems and is a major reason why people are not able to make much improvement in their lifestyle, which they would have in the absence of inflation. But let’s look at the situation from a different perspective. What is the difference between a stagnant income and zero inflation and increase in both prices and inflation at the same rate? Aren’t they the same?
In both cases, your actual budget plan remains the same. It’s like one day you wake up and find some extra zeros in your income and savings. Does it make any difference in your well-being? No, because it’s just like the entire monetary system is multiplied by, say, 10 or 100? So a reasonable rate of inflation does not affect your well-being.
Why is Inflation a Concern?
The above reasoning does not mean that inflation has no issue at all. Inflation causes problems for future planning; if the prices do not change, one can easily plan out their long-term future expense. But inflation becomes a barrier. Very high inflation is also a big problem and needs serious attention. But a nominal one is okay and can be ignored.
Inflation as a booster
Much to everyone’s amazement, inflation is sometimes good as well. For example, if employers want to impose a wage cut (which may be due to various economic reasons), inflation becomes a helping hand.
Suppose the pay rate of a person is increased by 2%, but the inflation rate is 5%; the worker is getting a fall of 3% in his purchasing power, but according to general human behavior, this is seen as a wage rise rather than a fall of purchasing power. So inflation also helps bring significant economic changes because a wage cut of 3% with zero inflation would not be acceptable to humans due to their psychology.
Hence, inflation is mainly a monetary phenomenon that does not significantly impact one’s life till it’s at a nominal rate.
Last Updated on by kalidaspandian
