Why is a low inflation rate preferable to no inflation?

Question

and how does low inflation promote economic growth more than no inflation?

Answer 1

1. Downwards stickiness in wages and prices. Wages in particular are very hard to negotiate downwards as people and trade unions are naturally very reluctant to accept nominal cuts in wages. However if downward adjustments were not possible the disequilibrium in the economy would cause instability and a lack of growth. A low inflation rate allows real wage decreases, while avoiding nominal cuts simply by having a wage increase rate lower than that of inflation. It is in this sense that inflation has been called the grease on the wheels of the economy.

2. Zero inflation increases the risk of the economy slipping into deflation and worse a deflationary spiral. The decrease in prices causes wages to fall and less goods to be produced, which in turn causes prices to fall further causing further decreases in wages, goods production and employment. A low rate of inflation provides a safety barrier against this. Deflation is also very hard for a monetary authority to correct. Interest rates typically cannot be offered at a negative rate with any effectiveness.

3. Maintaining a zero inflation monetary policy can lead to unpredictability and instability in the economy. A inflation targeting policy like the 2% policy of the Bank of England seeks to maintain a constant rate of inflation. Adherence to a constant rate allow firms to make reasonable prediction in the future about price and wage levels. This policy also makes no attempt to correct for past deviations. It lets by gones be by gones. A zero inflation policy does not. A past period of inflation must be corrected by a period of deflation. Past deviations cannot be let go as a set price level has to be maintained. This need to correct past deviations means that the monetary authority may have to drastic action to swing the economy in the other direction and so actually increase unpredictability and instability in the economy rather than decrease it.

4. Since at low levels of inflation, the real interest rate is normally still positive, inflation provides a savings and investment incentive as it is preferential to do this than just have your money lying about. This is particularly good for higher return, but higher risk projects that are still beneficial to the economy but may have been ignored if firms/investors were not looking for inflation exceeding returns.

5. The costs of inflation, such as menu costs, show leather cost and unpredictability are typically very low when a stable rate of inflation between 1-5% is maintained.

Answer 2

This question comes up from time to time.

I disagree strongly with the previous answers. Inflation is not progress, growth, or anything of the sort.

One thing that inflation does is prevent people from 'hoarding' money, since money looses value a small percent every year. Thus, you should at least put your money in the money market or a CD or what have you. This encourages a bit more investment or a bit more spending than would otherwise occur.

It was thought once (The Philips Curve) that you could have a bit of inflation and get less unemployment. This was because workers would actually be receiving less wages through inflation and people who loan money will be receiving less money back (wages and interest rates adjust more slowly than prices). But people eventually catch on and in the long run, there is no trade off between expected inflation and unemployment (you just end up with inflation).

However, if the FED doesn't know exactly where to put the money supply, it should error on the side of less wages, because then output increases. So this is my more favorite idea of a little inflation is preferable to no inflation.

Finally, not only does the FED not know exactly how much money the economy needs, but we don't even know exactly what the inflation rate it. New studies have shown that the measured inflation rate is actually about 1% than real inflation. So once again, the FED should error on the side of a little bit of inflation (measured by the CPI index).

Answer 3

0 Inflation

Answer 4

Inflation is most basically caused by two factors: an increase in demand, or a decrease in supply. Both of these events would cause an increase in the general price level. The most common decrease in supply is caused by an increase in the production costs for a firm. Assuming this remains the same, and assuming (like the UK government) that economic growth is another of your macroeconomic objectives, then an increase in demand is necessary to stimulate economic growth within an economy. This would cause what is known as demand-pull inflation which is why inflation is seen as necessary for a growing economy.

Technically, no inflation is feasible whilst maintaining economic growth through the use of supply-side policies. These policies help increase supply, which in fact allows the economy to grow through its increased demand and therefore greater consumption, due to many factors. An increase in supply equivalent to that of the increased demand would theretically result in inflation of zero. Also the increased supply would help stimulate economic activity and economic growth in the long-run, serving the economy better for future generations.

I hope this helps answer your question.

Answer 5

Inflation is defined as a persistent increase in the general level of prices.

On the one hand, Low inflation rate is better than no inflation rate because there is a negative relation between inflation and unemployment(philip curve). If we reduce the inflation rate to zero, its mean we are pushing unemployment rate outward and unemployment is not good for economy. it is not only the loss skills but it also the loss of many other things such as tax revenue and etc.And if we increase the inflation rate, consequently, unemployment rate will decrease and economic growth will increase.

on the other hand, low rate of inflation in not good as compare to zero inflation rate, as from the defination inflation rate is an increase in general price level. its mean that poor peaple will suffer from the inflation and most of the population of the world is poor. Because inflation is rising means price are rising which is not good for people.

To sum up, Low inflation rate between 3 to 4% is considerable thats why low inflation rate is more preferable than no inflaion rate.

Answer 6

If there is no inflation in an economy, it is not a healthy economy. Inflation is an indicator of economic growth which is definitely desirable as it allows the economy to expand it's production possibilities. If there is no inflation, there is no growth and the economy is stunted. We control inflation by fiscal (taxes and government spending) and monetary (interest rates) as we have set guidelines of how much inflation is healthy for the economy.

Answer 7

The answer is it isn't and it doesn't.
This is a government thing: even with millions, billions, facing starvation and need, govenments encourage larger populations. It is the same with inflation: without govenments printing useless money, there is no inflation. Supposedly, getting more and more money encourages people, because they seem incapable of remembering that it costs more and more. When I earned only $1,000 a year, I lived better than I do now; but, I can remember what things used to cost. But, the govenments figure if you borrow $1000 now, you pay it back in devalued money, supposedly a bargain.

Answer 8

0= flat economy. Inflation reflects the activity. What I think a 4% ave. over the last like 38yrs in US.

Answer 9

Because the cost of reaching 0 inflation is greater than its benefit. And, then, there's always the nasty cost of disinflation. No one wants that!

Answer 10

Dunno....Ive ever been so well off as I was in the mid-eighties when inflation was over 15%