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Pros and Cons of Inflation

Inflation is a widely challenged economic issue. Even the term inflation can have multiple meanings in different situations. Many economists, businesspeople, and politicians believe that moderate inflation levels are required to stimulate consumption, reasoning that higher levels of spending are essential to economic progress. Here this article gives the pros and cons of inflation to better understand this topic.

Pros or Benefits of Inflation

  1. Economic growth is defined by moderate inflation, which may be sustained and stabilized over time. This is because prices and salaries naturally increase in harmony, allowing consumers to continue borrowing and spending while businesses earn more.
  2. Moderate rates of inflation allow prices to adjust and goods to reach their true prices. Moderate rates of wage inflation, allow relative earnings to adjust. Normal wages remain sticky downwards. With moderate inflation, firms can freeze pay increases for less.
  3. A moderate rate of inflation allows prices to adjust and goods to reach the real price.
  4. Borrowers typically gain from inflation, particularly when it appears to be an increase in income. Individuals who take out a loan before inflation and wage increases frequently benefit from having more money to pay down their debts.  Customers increase their deposits, thus financial institutions have more money. This makes it easier to borrow from banks.
  5. Moderate wage inflation allows for relative wage adjustments. Nominal wages remain sticky downwards. With mild inflation, employers can block pay increases for less productive employees, giving them a genuine pay cut.
  6. Moderate inflation rates are suggestive of a strong economy. Economic expansion is frequently accompanied by some level of inflation.

Cons or Drawback of inflation

  1. Inflation reduces the value of a currency, individuals may demand more money to meet their requirements. Inflation also drives up the cost of living, making it difficult for people to save. A high inflation rate may have a greater impact on older people, who rely significantly on their savings.
  2. Inflation often reduces an economy’s competitiveness. This is typical in countries that share the same currency. Inflation is one of these countries that could leave the country unable to value its currency. This may hinder its efforts to restore its economy and result in lower exports.
  3. Hyperinflation can destroy the economy. If inflation becomes out of control, it can set off a vicious cycle in which rising inflation raises inflation expectations, which drives prices even higher. Hyperinflation can wipe away middle-class savings and transfer wealth and income to those with debt, assets, and property.
  4. Higher inflation reduces international competitiveness, which leads to fewer exports and an increasing current account balance of payments. This is particularly problematic in a fixed exchange rate system, such as the euro, because countries do not have the option of devaluing.
  5. Inflation can lower the real value of savings, which can significantly impact older people who rely on them. However, it is dependent on whether interest rates are higher than the inflation rate.

Thank you for reading this article. If you have any queries regarding our article on the Pros and Cons of Inflation, then do leave a comment in the comment section below.

Explore more information:

  1. Pros and Cons of Economic Growth
  2. Pros and Cons of Deflation

Author Profile

Jay Solanki > Expert Content Writer
Jay Solanki > Expert Content Writer
Jay Solanki is an expert writer with 8+ years of experience as a content writer. They specialize in making complex topics like insurance and technology easy to understand. Jay has written over thousands of articles to help people become confident about technology knowledge. Prior to joining Way2benefits’s editorial team in 2020, Jay worked as a Digital Marketing Expert and user experience researcher, producing content for US based firms.