Why moderate inflation

Some claim that inflation benefits some businesses or individuals at the expense of most others. Inflation is often used to describe the impact of rising oil or food prices on the economy. This may cause many other prices to rise in response. However, most economists consider the actual definition of inflation to be slightly different.

Inflation is a function of the supply and demand for money, meaning that producing relatively more dollars causes each dollar to become less valuable, forcing the general price level to rise. 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.

More demand, in turn, triggers more production to meet that demand. British economist John Maynard Keynes believed that some inflation was necessary to prevent the Paradox of Thrift. Which says, if consumer prices are allowed to fall consistently because the country is becoming too productive, consumers learn to hold off their purchases to wait for a better deal.

The net effect of this paradox is to reduce aggregate demand, leading to less production, layoffs, and a faltering economy. Inflation also makes it easier on debtors, who repay their loans with money that is less valuable than the money they borrowed.

This encourages borrowing and lending, which again increases spending on all levels. Perhaps most important to the Federal Reserve is that the U. Economists once believed an inverse relationship existed between inflation and unemployment, and that rising unemployment could be fought with increased inflation. This relationship was defined in the famous Phillips curve.

The Phillips curve was largely discredited in the s when the U. Board of Governors of the Federal Reserve. Federal Reserve Bank of St. Federal Reserve. Your Privacy Rights. The roles of seigniorage, indexation and disindexation, the exchange rate commitment, and monetary and fiscal policy are examined. The evidence suggests that seigniorage plays no more than a modest role in the persistence of moderate inflations and that such inflations can be reduced only at a substantial short-term cost to growth.

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It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide. Sign In or Create an Account. Sign In. Advanced Search. Search Menu. Richard S. This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Economy Inflation is healthy for the economy — but too much can trigger a recession An inflation watcher used the current US situation to break down inflation for the layperson By Richard S Warr Published: Thursday 13 June What is inflation? Why low inflation is bad Very low inflation usually signals demand for goods and services is lower than it should be, and this tends to slow economic growth and depress wages.

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