Sage here for Kalkine media please subscribe to the channel and press the bell icon to be
notified of the latest videos in today's trending topic we're covering is inflation good or bad
inflation may not necessarily be a bad term when used in the context
of investing in economic growth and economists and policy experts have a complex relationship
with inflation which is largely dependent on the level of inflation present in the economy
and generally low levels of inflation are ignored and are not seen as detrimental to the economy
however when high inflationary pressures are prolonged then it becomes an issue of concern
for policy makers and high inflation can do more damage than benefit to the economy by reducing the
purchasing power of individuals however economic experts would not immediately ward off inflation
as a bad thing necessarily and inflation can sometimes rev up the economy and push it out of a
slowdown major central banks use inflation rates to gauge the health of the economy and decide
which policy to implement and here is a look into the good and bad implications of inflation
how inflation stimulates the economy it can perplex to think how increasing prices are
advantageous to the economy but there are various reasons why inflation is welcomed
by economic experts and the positive implications of inflation are multifaceted which include
lessening the government deficit while inflation eats away the value of money held in deposits
it also deteriorates the value of deficits held by governments and thus governments may accept
some level of inflation with open arms because the deficit held by them would be eroded away
up to some extent without having to implement any new policies in the economy a sigh of relief
for borrowers inflation leaves borrowers in a better position than they were in before and
those borrowers who have outstanding debt would be at an advantage as the money they had borrowed
was more valuable than the money they would have to repay the liability with and thus in real terms
borrowers would have to pay back lesser amounts of money after price levels rise consider the
hypothetical example where in an individual takes an interest-free loan of one dollar from the bank
the borrower has made an agreement to repay the dollar in 10 installments of 10 cents each month
now suppose prices rise but the repaying agreement remains the same and even when prices of other
commodities are rising the 10 cents paid by the borrower each month remains fixed leaving
him better off than before a spike in spending inflationary expectations are key stimulators
in the economy when prices are rising in the economy consumers develop inflation expectations
of the future as well and this means that they expect prices to rise in the coming months too
thus consumers believe it is better to buy now rather than later leading to higher economic
activity in the present as firms anticipate high demand in the economy they increase their
production capacity and hire more workers and this increases employment and production
leading to a higher gross domestic product however this cycle may be hampered when inflation lasts
too long reduced risk of deflation deflation is nothing but the decline in prices over time
as lucrative as that may sound deflation brings along with it certain challenges and when
consumers observe deflationary pressures setting in they wait for prices to drop further before
they can make their purchase and this is known as the paradox of thrift this effect of deflation
tends to reduce consumption in the economy thus inflation wards off any deflationary expectations
for some time how detrimental is inflation well experts believe that inflation levels higher than
two to three percent can be harmful for an economy under normal circumstances and prices are always
on the rise which explains why the amount of goods that could be bought with a dollar has declined
over the years inflation may not always lead to a simultaneous increase in wages the increase
in wages occurs at a lower rate than prices and employers may increase wages up to some extent
owing to the higher prices received by them after inflation individuals with their money and savings
will not see real returns when prices rise it is a good idea to look for inflation-free investment
options to ensure that real returns are obtained in investment and the value of the money lying
with individuals does not erode inflation can also reduce the international competitiveness obtained
by a country over its counterparts increasing prices can deflect the demand for international
trade to other countries and thus net exports fall and thus the above factors are testament
to the ambivalent nature of inflation therefore experts do not consider inflation as a completely
negative sign a certain level of inflation can help stimulate the economy
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