"Americans generally view rising prices as something to fear. But right now, a little inflation may be just what the economy needs."
This statement serves as the beginning of an article that attempts to demystify most of the general public's misconceptions about the role of inflation in the economy. Much like what we have been studying in class, increasing inflation cannot be addressed as a simple issue. Especially with this relatively new and very possible threat of deflation, an increase in inflation does hold some merit as a tool to improve the condition of the economy. Inflation could make the average debt of consumers more manageable and also encourage businesses to invest more. Further benefits can be seen from increasing inflation in the American economy, as we slowly continue our recovery.
Inflation could be particularly useful now for the labour market in the face of slowed real economic growth. Since wages are highly sticky downward, inflation could allow for real wages to reach the new equilibrium levels without a decrease in the nominal level. Either way, inflation indicates expansionary policy, which is highly necessary in times of recession.
ReplyDeleteInflation can indeed be good for the economy. If there is inflation, businesses can afford to hire more people because real wages will go down. And if more people are hired, there will be more consumer spending. So maybe this domino effect could jump start the economy.
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