The benefits of inflation could jump-start the economy

Inflation

The benefits of inflation include more coin in your pockets, over time. Image: Flickr / MoneyBlogNewz / CC-BY

It may sound crazy to some people, but the benefits of inflation could help the economy. Studies have shown that most people are against inflation. Moderate inflation, however, could get the stagnant economy going.

The benefits of inflation – the basics

Inflation is a simple concept. When prices go up, the “real” value of money goes down. Inflation leads to increasing prices. Inflation also reduces the amount of risk that people and companies are willing to take on. Usually, the Fed controls inflation by raising interest rates, which makes it harder to take on risk. This action makes it more “expensive” to borrow money, both short term loans and long term loans.

The benefits of inflation for states

The Fed controls federal monetary policy with the banking system. Fed monetary policy uses the banking system to generate effects throughout the economy. With this centralized approach, many states have  inflation rates that may be more or less than the federal rate. Nevada, for example, has an inflation rate slightly higher than the federal average. Nevada’s economy is also recovering slightly faster than the national average. In Nevada, the benefits of inflation include making existing debt worth less and making wages rise to match inflation. Over time, people in states like Nevada have more money to spend and less “real” debt to pay off.

Why we hate inflation, despite the benefits

Inflation is often considered a dirty word — for logical reasons. Rising prices reduce purchasing power. The decreasing value of money also makes individuals more risk-adverse. From a fiscal standpoint, however, inflation can help the economy grow. Inflation shrinks debt to more manageable proportions. Inflation also discourages “quick fixes” for financial problems. Plus, when inflation is kept under control, “real” wages aren’t reduced and the standard of living improves.

Sources

New Yorker
Amateur Asset Allocator

Other recent posts by bryanh