Why inflation is important for country's economy?

Answer 1

Mild inflation is good for the economy, because it promotes consumption without destroying the value of people's savings.

If you take more advanced economic courses down the road, you'll learn the theory of why people have certain savings/consumption tradeoffs, and how they decide on them.

Here's how mild inflation helps:

If you know something is slightly going up in price down the road, you'll be more likely to purchase it now. If this effect is mild, it doesn't hurt savings rates very much.


Deflation, however, punishes an economy because it hurts consumption. If you know something will be cheaper tomorrow (or next year, etc, etc), you're more likely to wait until tomorrow to buy it.

Answer 2

Mild Inflation

Answer 3

Gas prices are high, because the price of oil is high. The US can do nothing about the price of oil on the world market. The US cannot stop a worldwide food shortage. Were not stuck in Iraq, we are there because we want to be. People are losing their homes, because they bought houses far larger and more expensive than they could afford. The government has no role in helping them keep the houses they should have never bought in the first place. The government doesn't create jobs, nor gives people pay raises. But I don't know anyone, whose focus of attention is on Rev Wright. But he is a legitimate issue, since a candidate for president associated with the man for 20 years, and says he never noticed anything amiss during that time, but now disagrees with every word Rev Wright says.

Answer 4

Want to have a glad garbage bag of worthless currency to buy a loaf of bread that is why countries control money supply. There on reason why inflation nasty to the economy, and put the politcans head to the open fire

Answer 5

Inflation and deflation can be bad for the country and the economy. When inflation and deflation are within control and the economy has steady growth this is best for the economy.

Answer 6

X has a great answer, but some economists say that slow, steady inflation is actually healthy for the economy. thats what i believe.

Answer 7

inflation is not good for a country, it devalues its currency.

Answer 8

Before we begin our journey into the macroeconomic village, let's review the terminology inflation.Inflation can mean either an increase in the money supply or an increase in price levels. Generally, when we hear about inflation, we are hearing about a rise in prices compared to some benchmark. If the money supply has been increased, this will usually manifest itself in higher price levels - it is simply a matter of time. For the sake of this discussion, we will consider inflation as measured by the core Consumer Price Index (CPI), which is the standard measurement of inflation used in the U.S. financial markets. Core CPI excludes food and energy from its formulas because these goods show more price volatility than the remainder of the CPI.
So how much inflation is "too much"? Asking this question uncovers another big debate, one argued not only in the U.S,. but around the world by central bankers and economists alike. There are those who insist that advanced economies should aim to have 0% inflation, or in other words, stable prices. The general consensus, however, is that a little inflation is actually a good thing.The biggest reason behind this argument in favor of inflation is the case of wages. In a healthy economy, sometimes market forces will require that companies reduce real wages, or wages after inflation. In a theoretical world, a 2% wage increase during a year with 4% inflation has the same net effect to the worker as a 2% wage reduction in periods of zero inflation. But out in the real world, nominal (actual dollar) wage cuts rarely occur because workers tend to refuse to accept wage cuts at any time. This is the primary reason that most economists today (including those in charge of U.S. monetary policy) agree that a small amount of inflation, about 1-2% a year, is more beneficial than detrimental to the economy. Nigeria essentially has two weapons in its arsenal to help guide the economy toward a path of stable growth without excessive inflation; monetary policy and fiscal policy. Fiscal policy comes from the government in the form of taxation and federal budgeting policies. While fiscal policy can be very effective in specific cases to spur growth in the economy, most market watchers look to monetary policy to do most of the heavy lifting in keeping the economy in a stable growth pattern. In Nigeria, the Central Bank is charged with implementing monetary policy, which is defined as any action to limit or increase the amount of money that is circulating in the economy. Whittled down, that means the Federal Reserve (the Fed) can make money easier or harder to come by, thereby encouraging spending to spur the economy and constricting access to capital when growth rates are reaching what are deemed unsustainable levels.There is as much debate over how to calculate GDP and inflation as there is about what to do with them when they're published. Analysts and economists alike will often start picking apart the GDP figure or discounting the inflation figure by some amount, especially when it suits their position on the markets at that time. Once we take into account hedonic adjustments for "quality improvements", reweighing and seasonality adjustments, there isn't much left that hasn't been factored, smoothed, or weighted in one way or another. Still, there is a methodology being used, and as long as no fundamental changes to it are made, we can look at rates of change in the CPI (as measured by inflation) and know that we are comparing from a consistent base. There has been so much learned talk about the threats and dire consequences of inflation that plain folks begin to be suspicious. Did not the economists of the 1920s, except for a few outsiders whom the others scorned as orthodox doctrinarians, forecast everlasting prosperity? What if their present fears are no better founded than their optimism fifteen years ago? The layman, therefore, has the right to ask the specialist to explain the matter and to do so in simple terms. We economists should not be exempt indefinitely from the obligation, which is accepted by doctors, engineers, and other scientists, of making ourselves understood by the layman. The obligation is clear-cut in the matter of inflation, an economic problem which is as close to every American as his own skin.
Everybody knows that inflation consists of a large increase in the available quantity of money and money substitutes such as bank credits. In a country like the United States, which transacts so much of its business by checks and through bank credits, the main vehicle of inflation is not so much the printing of additional paper money as the increase of deposit currency. Everybody also knows that a general rise of prices and wages is the unavoidable and inescapable result of inflation. And finally, most people realize that when inflation is going on price control is a quite ineffective method of controlling prices and wages; at best, it is a temporary expedient to break or postpone the force of inflationary effects.
There is widespread ignorance, however, concerning the social implications of inflation. How will it affect you personally, if you are a professional man, a worker, a farmer? What will it do to your possessions, your debts, your insurance policies? I refer you to this page: http://www.mises.org/efandi/ch18.asp#

Social and Economic Effects of Inflation
The first fact that needs to be noted in answering such questions is that inflation is detrimental to all creditors. The higher prices rise, the lower will fall the purchasing power of the principal and interest payments due. The dollar which was loaned out had a higher purchasing ability, could provide more goods, than the dollar which is paid back.
And who is a creditor? Does inflation touch only businessmen and financiers? Nothing of the sort. You who read these lines are certainly a creditor. Every person who has a legal claim to deferred payments of any kind is a creditor. If you have a savings account with a bank, if you own bonds, if you are entitled to a pension, if you have paid for an insurance policy, you are a creditor, and are, hence, directly hit by inflation.
Professional men, civil servants, commissioned officers of the armed forces, teachers, most white-collar workers, salaried employees, skilled specialists, mechanics, and engineers normally provide for their own old age and for their dependents in ways that make them creditors, that is through savings, insurance, pensions, and annuities. Moreover, Social Security has brought the great masses of ordinary workers into the ranks of creditors. For all these millions of people, every further step towards inflation means a further decline in the real value of the claims or credits they have saved up by years of toil and sacrifice. They will collect the number of dollars to which they are entitled—but each of those dollars will be thinner than it used to be, capable of providing less food, clothing, and shelter.
The loss of the creditor, of course, is the profit of the debtor. The man who borrowed a thousand or a million full-sized dollars repays his lender with a thousand or a million depreciated dollars. The mortgages on farms and on real estate, the debts owed by industrial enterprises, all shrink as inflation proceeds. Thus, a comparatively small group of debtors is favored at the expense of the teeming groups of creditors.
The most fateful results of inflation derive from the fact that the rise of prices and wages which it causes occurs at different times and in a different measure for various kinds of commodities and labor. Some classes of prices and wages rise more quickly and rise higher than others. Not merely inflation itself, but its unevenness, works havoc.
While inflation is under way, some people enjoy the benefit of higher prices for the goods or services they sell, while the prices for goods and services they buy have not yet risen or have not risen to the same extent. These people profit from their fortunate position. Inflation seems to them "good business," a "boom." But their gains are always derived from the losses of other sections of the population. The losers are those in the unhappy situation of selling services or commodities whose prices have not yet risen to the same degree as have prices of the things they buy for daily consumption.
These victims, by and large, are the same kind of people—roughly, the middle classes—who are injured as creditors through the depreciation of their bank savings, insurance policies, pensions, etc. The salaries of teachers and ministers, the fees of doctors, go up only slowly as compared to the tempo with which prices of food, rent, clothing, and so on, go up. There is always a considerable time lag between the increase in the money income of the white-collar workers and professional people and the increase in costs of food, clothing, and other necessities.

Hedging Against Inflation
Has the average man any means of evading the detrimental effects of inflation?
Those insured, or entitled to pensions or social security benefits, cannot avoid being victimized. And the picture is not much brighter for other groups of creditors. Of course, the bondholder may sell his bonds and the bank depositor may withdraw his balance. But if they keep the money, they are no less subject to the harmful effects of the fall in the money's purchasing power. In other words, the dollar continues to evaporate whether it is resting in a bank, a bond, or a strongbox at home.
For the Europeans, struck by the great inflations of World War I and its aftermath, there was a simple means of escape. They needed only to change their local currencies for the money of a country with a sound currency. They bought dollars or they bought gold. It might have been illegal, but it worked. For Americans, no such remedy is available. If the dollar goes bad, no foreign currency can conceivably prove better. At the same time, the U.S. government has closed the avenue of escape by forbidding its citizens to own gold coins or ingots.
You may buy a farm. But that is a remedy only if you become a farmer and till the soil with your own hands. Otherwise, it is a remedy not for yourself but for the tenant who works the farm. It may reasonably be expected that, in the course of inflation, new laws will safeguard tenants—whether on farms or in residences—against rises in rent. In European inflations, rents were always restricted by legislation.
You may buy a home for yourself and your family. But in a period of inflation, economic conditions change swiftly and in unexpected ways. You cannot foresee whether it will be necessary suddenly to change your place of residence and employment. Then you will have to sell the house—renting it is almost useless—and experience proves that such forced sales rarely bring the amounts laid out for acquiring the property.
You may buy common stock. But the experts are convinced that taxation will confiscate not only the profits but a good deal of the capital invested, too. While the prices of all commodities are rising, stock market quotations may still cling more or less to pre-inflation levels. This means that in owning common stock you are not much better protected than in owning bonds.
You may buy jewelry and other valuables. But you cannot always expect to sell these at a later date for what you paid for them. Nobody knows in advance how the market conditions for any given valuable will develop. Diamonds and rubies, for instance, may hold much of their value. But what if the owners of the largest hoards of precious stones should unload them because of changing political or social conditions?
Neither is it possible to escape the detrimental effects of the time lag between the rise of different prices and wages. Trade union policies are futile in this connection. As long as the war (World War II) is going on, labor may succeed in obtaining, at least for some groups, wages which correspond to the rise of commodity prices. But sooner or later if industry does not keep pace, they will face the choice between a sharp decline in wages and the maintenance of high wage levels with long-lasting unemployment for millions. In the long run, inflation hurts the interests of all groups of labor, as well as those of the middle classes.
There is only one class which, as a whole, derives profit from inflation: the indebted farmers. Their mortgages are wiped out and the products of their own toil bring higher returns corresponding to the higher prices they must pay for things they purchase.
The owners of really large fortunes, too, may succeed in preserving a greater or smaller portion of their wealth, but inflation results in the consumption of a good deal of a nation's capital stock.
Even if some special groups profit, the whole country is poorer.

Moral and Political Effects of Inflation
Worse than the immediate economic consequences of inflation are its attendant moral and political dangers. It has been asserted that Nazism is the fruit of the vast German inflation of 1923. That is not quite correct. It would be more correct to say that the great inflation and the Nazi scourge both derived from the mentalities and the doctrines that long dominated German public opinion. The State, which the German socialist Ferdinand Lassalle had already proclaimed as god, was supposed to be able to achieve anything. The omnipotent State was credited with the magic power of unlimited spending without any burden on the citizenry. Money, said the German "monetary cranks," is a creature of the State; there is no harm in issuing infinite quantities of paper currency.
Fortunately, such superstitions are strange to the healthy common sense of America. Inflation, therefore, will never go as far in this country as it did in Germany. Even a much more moderate inflation, however, shakes the foundations of a country's social structure. The millions who see themselves deprived of security and well-being become desperate. The realization that they have lost all or most all of what they had set aside for a rainy day radicalizes their entire outlook. They tend to fall easy prey to adventurers aiming at dictatorship, and to charlatans offering patent-medicine solutions. The sight of some people profiteering while the rest suffer infuriates them. The effect of such an experience is especially strong among the youth. They learn to live in the present and scorn those who try to teach them "old-fashioned" morality and thrift.

Inflation and Government Borrowing
The writer, having witnessed the course of inflations in one European nation after another, believes that it is not too late to stop further inflation in the United States by bold and painful measures. Inflation is not an act of God. It is a result of the methods used to provide a part of the means for the conduct of the war. One set of methods can still be replaced by another, less harmful set. It is still possible to keep down the amount of money and money substitutes by financing the total amount necessary through taxation and loans.
People sometimes call inflation a special way of "taxing" a country's citizens. This is a dangerous opinion. And it is wholly untrue. Inflation is not a method of taxation, but an alternative for taxation. When a government imposes taxes, it has full control. It can tax and distribute the burden any way it considers fair and desirable, allotting a larger share of the tax burden to those who are better able to carry it, reducing the burden on the less fortunate. But in the case of inflation, it sets in motion a mechanism that is beyond its control. It is not the government, but the operation of the price system, that decides how much this or that group will suffer.
And there is another important difference. All taxes collected flow into the vaults of the public treasury. But with inflation, the public treasury's gain is less than what it costs the individual citizen, since a considerable part of that cost is drained off by the profiteers, the minority that benefits from the inflation.
It is no less fallacious to consider inflation as a method of raising loans for public use. Technically, inflation does increase the total of the government's indebtedness to the banks. But the banks' intervention is only instrumental. If the government borrows from the banks, the banks do not grant loans out of their own funds, or out of money deposited with them by the public; the banks are not real lenders; they grant the loans out of their "excess reserves." They merely expand credit for the benefit of the government. In other words, they increase the quantity of money substitutes.
When you as an individual buy a government bond, you make a loan to the government; you put part of your cash holdings into the hands of the treasury. There is then no increase in the total quantity of currency or credits available and hence no inflation.
However, it is different when government borrows from the banks' "excess reserves." Their so-called "excess reserves" are not a tangible thing. The term is merely a phrase indicating the limits within which the law is prepared to tolerate credit expansion, that is to say further inflation. The effects of loans from available "excess reserves" are just as inflationary as the effects of issuing more paper money. It is a mistake, therefore, to confuse this government "borrowing" from the "excess reserves" of the banks with genuine loans.
Popular education is absolutely essential. It is clear that the efforts of the U.S. government to collect the means necessary for the conduct of the war by taxation and by sale of government bonds represent sound measures for heading off inflation. Everybody should be made to understand that the burden of high taxes and of making personal loans to the government are minor evils compared to the disastrous and inexorable consequences of inflation. Not only for the sake of the national welfare, but for the sake of your own interests—whether you are rich or poor, employer or wage earner—you should do your best to arrest the further progress of inflation.