why is inflation both good and bad?

Answer 1

Hmmm....as a political economist I suppose I should answer this question? (I would first warn you against listening to some of the advice by previous posters, though: "higher inflation leads to higher yield on investment"? I ask you! What matters is returns corrected for price increases, and they're always lower when inflation is high.)

Inflation, on the whole, is commonly considered as bad. However, this is a net effect of some positive and negative sides. The main negative side of inflation is that it's normally associated with uncertainty. If one could be absolutely certain of, say, 10% inflation per year then, OK, let's adjust to this fact. However, that's never the case. An expected 10% inflation may mean anything between 5 and 15 per cent, and this depresses households' willingness to spend, investors willingness to invest and entrepreneurs' willingness to take a gamble. An expected 2% inflation may mean anything between 1 and 3 per cent, and everyone can live with that!

In addition, an unexpected inflation erodes the value of people's savings. A so-called "inflation tax" occurs when governments print large amounts of money, prices surge and people with nominal assets find themselves robbed of a large part of their fortune. This may sometimes be preferrable to other kinds of tax (war spending has sometimes been financed thus...) but it's never popular with the populace.

The main value of (a bit of) inflation lies in the fact that downward adjustments of real costs can be very difficult in a non-inflationary environment. Imagine, for example, that the world is flushed with textile workers all wanting to work for lower wages than in America/Europe/whereever... Textbook economics imply that real wages have to drop. However, telling people that they'll be paid less money next month is notoriously difficult and has sometimes led to revolutions. When, on the other hand, annual inflation is, say, 3% one can raise people's wages by 1% per year and still get the necessary adjustment. Voila... real adjustment is easier in an inflationary environment.

Answer 2

Actually inflation is never good as it devalues the currencies worth against other currencies. It Increases the prices of all products and can cause a raise in interest rates.
Take countries like Brazil for example, who have rampaging inflation. Going up at 100's of a percent each day. The people cannot afford the food. Their economy is in total meltdown. In fact around some of the outlaying communities in Brazil they have reverted to a bartering system.

Answer 3

Bad - devalues the money you possess and leads to price increases. May also discourage tourism as they opt to go somewhere less expensive. Good - usually leads to higher interest rates meaning you can earn more interest on savings. This then encourages people to save and subsequently should dampen economy and slow rate of inflation

Answer 4

Inflation is very good if you have a big mortgage, as your repayments become less and less, in real terms, as the years go by.

Answer 5

You get better intrest on savings but pay more insrest on loans.
The rich get richer and the poor get poorer