Inflation and your Money: Positive Effects of Inflation

From the last series, you now know how high inflation creates uncertainty and can wipe away the value of money savings. But I also mentioned that while inflation is a curse for some people, it is a blessing to others.

In fact, there are some, who believe that the primary function of inflation is to prevent deflation.

Here are the benefits of INFLATION:

1. Economists often correspond low levels of inflation to very weak economic growth and very high unemployment.

When the economy is not running at capacity, meaning there is unused labor or resources, inflation theoretically helps increase production.

More dollars translates to more spending, which equates to more aggregated demand and a need to meet that demand.

2. During Inflation, Debtors (borrowers) gain and Creditors (lenders) lose especially if the rate of inflation exceeds the interest rate on the loan.

Let me explain. Supposing you borrowed N100,000 from a bank for mortgage or business at a 5% interest rate per year making N5,000.

During inflation, the real cost of that N5k decreases because money is worth less and less. That way, debtors repay their loans with money that is less valuable than the money they borrowed.

Sounds like a cheat on the creditors, right? πŸ˜„

3. Real Estate owners (people you call Landlords) with fixed mortgage benefit a lot from Inflation because they are able to raise prices more arbitrarily each year. 🏘️

4. If the domestic inflation rate is greater than that of other countries, domestic products become less competitive and the rival country that produces the same products gain more from their exports because people will prefer to patronize foreign goods. πŸ‡¦πŸ‡ΊπŸ‡¬πŸ‡­

5. Also, inflation enables the cutting of wages. πŸ’°

Under normal circumstances, people usually resent the reduction of nominal wages. This can lead to prolonged disequilibrium and high unemployment in the labour market.

Nominal wages may remain constant while real wage falls. In this situation, it is easier to increase the wages of productive workers while unproductive workers can have their wages frozen – which is effectively a real wage cut.

6. When the above strategy is enforced in an organization, it could lead to more worker productivity.

When inflation is very low, the economy may be stuck in a recession. Therefore, targeting a higher rate of inflation can enable a boost in economic growth to some extents.

7. Deflation can be very harmful in the sense that when prices are falling, people tend to hoard their money in anticipation of purchasing at a much lower price.

They’ll keep delaying buying, thereby leading to an excess of produce in the market that people don’t want to buy.

Famous British economist John Maynard Keynes calls this phenomenon the “Paradox of Thrift.” The net effect of this paradox is to reduce aggregate demand, leading to less production, layoffs and a faltering economy.

A moderate level of inflation is necessary to avoid the paradox of thrift.

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In conclusion, the lack of inflation may be an indication that the economy is weakening.

As you can see, it is almost difficult to label inflation as either good or bad – it depends on the overall economy as well as your personal situation.

On this note, the next and final series on this topic, we will consider how you can improve your “personal situation” i.e your personal finance so as to stay ahead of inflation.

Do you have any questions or suggestions?

The Comment box is all yours.

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  1. Pingback: Inflation and your Money: How to Stay Ahead of Inflation - FINTEL Coach

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