Pros and Cons of Inflation

Readers Question: What are advantages and disadvantages of inflation?

The Government have an inflation target of CPI 2%. This suggests they would rather have moderate inflation than no inflation at all.

When looking at the pros and cons of inflation, it is important to consider what type of inflation is occuring.

For example, the cost push inflation of the present day is more damaging than demand pull inflation. This is because today’s cost push is squeezing living standards (aggregate supply is shifted left). The MPC is in a tight spot. If it increases interest rates it reduces inflation but causes recession.

With demand pull inflation it is easier to reduce inflation without causing downturn.

Advantages of Inflation

• deflation is bad leads to lower consumer spending and lower growth
• Moderate rates of inflation allows prices to adjust.
• Moderate rates of inflation is sign of a healthy economy.
• See: Advantages of Inflation

Disadvantages of Inflation

• Uncertainty, Confusion leading to less investment
• Lower international competitiveness
• Menu costs
• Inflation and stagnant wage growth leads to declining incomes.
• See more disadvantages of Inflation