Inflation may come from good events such as an increase in aggregate demand, economic expansion and rising wages. However, in the long-term, inflation is undesirable for a number of reasons, including the possibilities of erosion of savings, negative tax implications, lower production and employment, and lower investment.
First, inflation is not good for savers and may also mean more taxes for certain individual (South African Reserve Bank). As inflation rises, every dollar saved buys a smaller percentage of a good or service.
If Federal or state and local tax collection agencies do not make adjustments to their tax brackets, those receiving salary increases may wind up in a higher tax bracket and, thus, pay a higher percentage of salary to tax collectors.
Second, inflation can also be bad for production, productivity and investment (South African Reserve Bank). High inflation may cause entrepreneurs to devote more money to speculative assets to protect wealth and less to expansion of production and employment. When there is inflation, producers have trouble interpreting price signals. Thus, producers may wait much longer in inflationary times to expand business so that they can determine whether a higher price really reflects a true increase in demand. Further, inflation typically means higher interest rates are on their way (Walden and Williams). Of course, higher interest rates may it more expensive to borrow money and may limit investment.
As the graph on the next page shows, inflation is returned to the U.S. In 2007 after a long period of relative price stability. Further, many are concerned that future inflation will be high after all the government spending to get the economy back on track and to bail out troubled companies. Therefore, we may also get to experience first had why inflation is bad for savers, wage earners, production and productivity.
INFLATION
IN PER CENT)
SOURCE: Bank for International Settlements
Bibliography
Bank for International Settlements. Financial deleveraging, inflation and risks to global growth. http://www.bis.org/speeches/sp080623.pdf
South African Reserve Bank. Why is inflation bad? http://www.bis.org/speeches/sp080623.pdf
Walden, M. And Williams, S. Why is inflation bad? http://www.ncsu.edu/project/calscommblogs/economic/archives/2006/07/why_is_inflatio.html
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