Why is inflation bad

Why is inflation bad

Inflation in layman’s term is the economic condition wherein the prices of goods and services are continuously rising. It is also viewed as the decline in the value of money thus lowering its purchasing power. The government allows a low, stable, and annual percentage of inflation to help the economy achieve growth and development as time passes by.

However, there are people who see inflation as something bad especially if it increases too much, in fact it can even create a scare. People fear having a higher inflation and view it as something economically dreadful because it create problems that may hinder growth as well as employment.

In a normal economic condition, people are encouraged to save money, usually in banks, thinking that they might need it for future expenses. However during inflations, people are discouraged to continue saving since the value of money is declining. People think that it is much better to spend their money at the present time before it loses its value in the future.

Also, inflation alleviates consumer borrowing or loans. And by the time people are going to payback what they owe, the value of their money already decreased thus forcing the consumers to raise more money either by barrowing more or ask for a wage hike in order to keep up with the increasing prices of goods and services.

However, there is another side of inflation that affects the interest rates of the lenders and may intimidate borrowing. In general, a lender would include 5% interest rates in order to permit somebody a loan. But if the inflation is also at 5% degree, then the lender would want a 10% interest rate to support its business.  This will only scare the borrowers, and as a result investments will also decline. This causes economic insecurity and increases the risks of businesses to invest.

Post Comment