Is inflation necessarily harmful?

Question

discuss whether inflation is necessarily harmful,

DISCUSS whether inflation is necessarily harmful...

give me some examples pls...

Answer 1

Yes, inflation is always harmful. We accept inflation, though, because it usually is a consequence of economic growth, and economic growth is very good. This is why inflation is harmful. First of all, it erodes the value of wealth in fixed assets. For example, say you have $1,000 in a 1 year certificate of deposit (CD) with 5% interest. If you expect the rate of inflation over that year to be 2% per year then you will have $1,050 at the end of the year but only $1,030 in real terms because inflation eroded $20. Now say inflation is worse than you expected at 8% (in the 1970s they saw double digit inflation, so it could get even worse). In this case you would still have $1,050 but in real terms you would only have $970. In this case, even though you were investing at 5% you actually lost $30 in real terms. This is one example of the harmful effects of inflation. Another problem with inflation is that it erodes the wages workers receive. Because many employment contracts are long-term in nature, the agreed upon wage may be fixed. So, for example, say you sign a contract to be paid $50,000 per year for 5 years. If inflation is at 2% per year (which, by the way, is about where it is now), then in the fifth year your paycheck will only be worth $45,196 in real terms. Again, if inflation turned out to be worse, say 10%, then in your fifth year your paycheck will only be worth $29,524 in real terms. As you can see, inflation has a huge effect here. This is why there is a bit of an uproar over the fact that the minimum wage has not been raised in so long because it is worth much less now than when it was instated thanks to inflation. Another reason why inflation is harmful is because our tax system taxes nominal interest and nominal capital gains. Let's take the capital gains example. Capital gains are gains made when you buy an asset and then sell it at a higher price. Let's take the example of a share of stock. Between 1981 and 2003, the price level doubled (meaning everything cost twice as much because of inflation). If you bought shares of stock for $20,000 in 1981 and sold them for $35,000 in 2003 then you would be taxed on your $15,000 nominal capital gain. However, in real terms you actually lost money because $20,000 in 1981 money could buy what $40,000 could buy in 2003. So, in real terms you actually suffered a $5,000 capital loss.
Another way in which inflation is harmful is because it can arbitrarily redistribute wealth. The example here is of a lender and a borrower. Let's say a borrower wants to borrow $1,000 for 1 year. Now let's say that the lender wants 5% real interest on this loan, and also he predicts that for this year inflation will increase by 2% so he asks for 7% nominal interest (which is still 5% real interest with a 2% inflation premium added). If the lender is correct in his prediction then at the end of the year he will have $1,070 in nominal terms and $1,050 in real terms, which is what he wanted. Now, let's say he was wrong, and inflation actually rose at 10% for that year. He will still be paid back $1,070 in nominal terms, but in real terms he will only be paid back $970. As you can see, as a result of inflation, the borrower actually gained money by borrowing and the lender lost money by lending. This illustrates an important point about inflation. Steady inflation is much less of a problem thatn unpredictable inflation. If inflation was2% as the lender expected then there would be no problem. However, thanks to the huge unanticipated jump in inflation it turned out to be a big problem. In times of unpredictable inflation, investment declines and the economy can slow because lenders are less willing to lend for the reason we just illustrated--they are at risk to actually lose money by making a loan. Inflation also discourages investment because when calculating the benefit of undertaking a new project, a firm will try to predict future cash flows that will result from this new project. With inflation, all figures are adjusted for inflation except for depreciation because depreciation is determined by the government. Normally, depreciation provides a tax shelter for firms because they can subtract depreciation from their taxable income. However, since the price of everything else but depreciation increases due to inflation, depreciation offers an increasingly small tax shelter. This hurts the bottom line, and makes new investments look less attractive. Two important facts to remember (now that you know the details):
1) Low inflation is much less of a problem than high inflation because, though prices will rise, people will have the chance to adapt. In fact, people might not even really notice the inflation at all.
2) Predictable inflation is much less of a problem than unpredictable inflation. If inflation is steady then people can adjust to account for it (as with the example of the borrower and lender), but if it is unpredictable then it can wreak havoc.

Answer 2

I am not going to try to compete with jthomas, I agree with most of what he says. On the other hand, I will say that inflation is not always harmful. He gave you a couple of examples of lenders/investors being hurt by inflation. What about borrowers? A textbook definition of inflation is a condition which causes money to loose value over time. When a borrower goes into debt during inflationary times he repays the loan in the future with money which is less valuable (at the expense of the lender).

My parents are not financial geniuses by any measure, but they were in the right place at the right time. They bought a home for $40,000 in 1972 with a 6% (I think) mortgage. In the early 1980's they had bank accounts earning 12% or more. Today this home is worth $500,000.

Answer 3

Not really sure what to say

Answer 4

It can be.


But I find a good fart usually clears it.

Answer 5

imagine everything costs more day by day

Answer 6

not always

Answer 7

it depends...