Inflation is an increase in the general price level of goods and services in an economy over a period of time. It is often expressed as a percentage. It indicates a decrease in the purchasing power of a nation’s currency.
There are various types of inflation. They include demand-pull which occurs when the demand for goods and services increases than the production capacity of the economy.
Cost-push which occurs when there is an increase in the cost of production. Built-in inflation that occurs as a result of past events persisting in the present. Inflation is dynamic in nature.
Pros of Inflation
- It reduces the real value of debt
When there is inflation especially the demand-pull, then the value of the goods will reduce as the companies will be striving to produce good that can fit the market demand hence there will be no risks of debts as those who are able to purchase for the good are the ones that will be given the first priority.
- Allows adjustment of prices
Inflation allows the companies to adjust the prices of the goods as they will be able to know when the goods are in high demand hence easy to adjust and attain the real prices of the goods.
- It allows economic growth
When there is inflation, it is a sign that there is economic growth in a country as the goods will be on high demand and the companies will be able to make high sales which will bring a positive impact to the nation.
- It allows adjustment of wages
When there is inflation, the company will be able to adjust the wages of its workers as they will know exactly the right amount of money to be paid to the workers even during the deflation time.
Cons of Inflation
- Fall in value of saving
Inflation normally affects the value of saving in that the owner of the company will get a lot of money as he or she will be making high sales which will make him or her go for other services that will be costly to improve the production hence not able to save as usual.
- Reduces international competitiveness
When there is inflation, there will be high demand hence the companies will not be in a position to produce goods of high quality that are competitive in the international market hence they will not be able to export the goods which will reduce international competitiveness.
- Leads to lower growth and less stability
The goods will be produced as per the demand and that may affect the price of the goods which may be reduced hence low growth rate and no stability.
- Uncertainty and low investment
The owner of the company will not be sure whether to invest the money or increase the production to meet the high demand hence low investment.
- Reduces the real value of government bonds
This will result as a result of investors demanding higher bond yields to compensate. This will increase the cost of debt interest repayment.
Inflation really affects the economy of the country as many investors will demand high-interest rates which will make the country pay a lot to the investors. Many countries do not like inflation and they try all they can to curb it.