Why is inflation so widely feared?

Answer 1

Because it makes money smaller!

If you get a 10% annual pay increase, and general inflation is running at 10%, you actually got no more "buying power" at all!

What's not to fear?

Answer 2

Inflation is feared by investors. But it is welcomed by debt holders.

Your grandfather who talked about bread costing a nickel also paid $40,000 for a house with a $32,000 mortgage. When the value of the house went up with inflation, the value of the mortgage didn't change, so he was a big winner.

But consider an investor at the time who loaned out $40,000 and got back $100,000 10 years later. Sounds good, but that $100,000 was actually worth a lot less, so the investor took risks to stay even.

By the way real estate and commodities are often seen as inflation hedges, but stocks are really the best for the long run, having returned 5.95% a year vs 1.35%, inflation adjusted, for the past 40 years.

Answer 3

As my grandfather used to say, "I remember when bread was a nickel a loaf--but who had a nickel?" At that time, bread had generally jumped to a then obscene price of $1 a loaf. Last time I went shopping it was over twice that price.

Suppose you had saved money in your mattress, or can you buried in the backyard, afraid the banks would be closing and your money in it either sealed up or stolen. This is the financial sophistication and risks of most of the previous century and large parts of the world even yet today. When France adopted the Euro and gave the people a short time to exchange them, the banks were flooded with cash. The French government had no idea so much money had been horded at home and they weren't prepared for the volume of currency they needed.

Inflation to someone who saves money is a terrible cost, virtually a tax on savings. Imagine if you set aside money should you lose your job or become disabled. But those dollars won't buy as much as they used to buy. That is something to be feared. I get amused at all the articles in magazines for the 'monied' people who insist that if you are a multimillionaire (just one is certainly not enough), then you simply can't afford to retire when you get old. I have lots of elderly relatives who were far, far from being so rich but live very nicely (to their style of living). But even they show frugality and savings because they worry that their retirement pensions aren't growing enough to match inflation. That there will be days when they will again feel starvation, and not the kind because they want to fit into a smaller size dress but because they can't afford a roof over their heads AND food.

Incomes tend to rise during inflation (something I keep reminding my bosses), but prices tend to rise faster. That makes inflation something to be feared.

Added: Tyates, you are right, sort of. Actually, it was my step-grandfather, and the family was so proud of that $8,000 house with indoor plumbing and a bedroom for the boys and a bedroom for the girls, but it was all paid for by a settlement for when a train ran over my grandfather. Moving to a bigger town, they bought a house for $12,000 and had a mortgage payment of something like $43 a month, which at first was a lot of money, but, as you so well pointed out, was a bit of a joke later. Yet, an elderly aunt got an annuity for retirement income. At first, it too was a lot of money, but as she aged, prices rose and it increasingly seemed like a noose tightening about her neck because prices were rising and her income was mostly not (COLAs for the social security, but not the annuity). Still, your point was good.