Pratibhuti

Pros and Cons of Inflation

What is inflation?• Inflation is a phenomenon in which the average prices

of good increases for a certain period of time. • This increase in prices affects the demand and supply

of goods and not vice versa. • India has been facing constant inflation since 2010 at

the rate of 10%, however the worst inflationary phase was in Sept 1974 at 33.3%

Pros of inflation• Deflation can be a bane– As prices deflate, people delay purchases with the hope that

prices will fall further. This leads to a stop in the circulation of money causing the economy to fall.

• No debt burden– While taking on a debt, the ideal inflation rate expected is

2%. If the rate deflates instead of inflating, people will be forced to pay a higher debt, thereby increasing their debt burden.

• Adjustment of relative prices– A moderate inflation rate can enable countries to adjust

relative prices and regain competitiveness. This is especially helpful in countries with a single currency.

• Growth boost– At very low inflation rates, countries may suffer from

recession. Which is why some countries target a moderate rate of inflation which will push the circulation of money.

Cons of inflation• Reduces investment– Due to future uncertainties, people fear investing money

and then losing it later. This in turn reduces investments. In case of lower inflation rates, firms are willing to take a risk and invest, which improves stability.

• Reduction in value of savings–When the inflation rate is higher than the interest rates,

people with savings suffer the most since they do not receive their deserved interest.

• Uncompetitive economy– High inflation rates can make a county’s economy

uncompetitive. It reduces exports, thereby leading to a current account deficit, and lower economic growth.

• Economic boom and bust–While high inflation rates can lead to an economic boom,

bringing down the rates can then lead to sudden recession and bust the economy.

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