Inflation may be one of the most controversial concepts in all of economics.
For one thing, it’s a pervasive phenomenon that affects everyone, yet most people don’t pay any attention to it on a regular basis.
Furthermore, even if they did, there’s still the fact that financial experts consider it both good and bad.
Why Is Inflation Considered Bad?
Let’s begin by talking about why inflation is often considered harmful. Doing so will also help us discuss what inflation is in the first place.
Generally speaking, inflation describes the reduction of a currency’s buying power, and an increase in the cost of goods and services.
For example, if you look at the Consumer Price Index Calculator, you’ll see that inflation has reduced the buying power of the U.S. dollar over the past 100+ years. Generally speaking, inflation has increased by about 3% annually since the 1980s, according to the Department of Labor.
This is why many people view inflation as a bad thing: no one wants to spend more to buy the same amount of goods and services they paid for last year.
Another way to think about it is that unless you were also given a 3% raise this year, you are actually making less money doing the same amount of work.
Why is inflation considered good?
That’s not to say that inflation doesn’t have an upside..
The first example of inflation being positive for the economy is when consumers anticipate it, which means they buy more now, knowing that their money will soon be worth less.
In this situation, demand increases, which means companies sell more and manufacturers produce more. To meet this demand, both parties have to hire more workers, too. In fact, most central banks have inflation targets as one of their main goals in order to keep a healthy economic growth trend.
Another example of inflation having a good effect on the economy is when it prevents deflation, which is when the price of goods and services drops.
While deflation might sound great – it means you spend less to buy more – the problem is that the inverse of inflation happens: people now wait to see if prices are going to drop even more. Doing so means people buy less, so companies and manufacturers have to cut back on their workforces. Central banks usually try to avoid deflation at all costs.
One specific example of how bad deflation can be for the economy is the Great Depression. During this economic disaster, prices tumbled for 10 years, making it nearly impossible for American businesses to recover.
The Final Verdict on the Pros and Cons of Inflation
Although inflation is sometimes considered good and sometimes bad, for most of us, it is almost always the latter. By virtue of the fact that it reduces your money’s spending power, it would be wise to make efforts to protect your money from this phenomenon.
By signing up with Stash, you can invest your money and put it to work instead of waiting for it to potentially lose purchasing power. In fact, Stash Learn is giving new investors a special $5 sign-up credit to get started by just subscribing here.