Is Inflation Good?
Author: Kenneth ([email protected])
Published: Tuesday May 18, 2021
The law of supply and demand is a theory that explains the interaction between the sellers of a resource and the buyers for that resource. The theory defines the relationship between the price of a given good or product and the willingness of people to either buy or sell it. Generally, as price increases, people are willing to supply more and demand less and vice versa when the price falls.
Inflation is good when it is mild at around 2% annually. When prices are going up, people want to buy assets like property and equity now rather than pay more later too. Although it lowers your competitiveness, stores hire more to produce more and factories produce more now. It creates a virtuous cycle, boosting economic growth.
When prices fall, although it increases demand, businesses reduce their inventory. As a result, factories produce less and lay off workers. Unemployment rises, leading to wage deflation. Workers have less money to spend, which reduces demand even more. Businesses lower their prices further. That makes deflation worse. For this reason, deflation is even more corrosive to economic growth than inflation.