June 01--Is inflation good or bad? You'll hear it both ways, and the answer rests largely on whether you're talking about national economies or individuals and families, big borrowers or big spenders, you or me.
At Marketplace.org, there's an excerpt from a book by senior editor Paddy Hirsch that seeks to explain in simple terms why some inflation is a good thing. In the excerpt, a shop owner raises prices for his limited supply of candy when a family of 10 children moves into his small town. The "inflation" devalues every candy buyer's cash but gives the shop owner more money to spread around and help the economy. "Inflation may devalue existing currencies a little bit, but that can be offset by the fact that there's a lot more money coming into the system: money to spend, or invest, or build, or even hire more staff," Hirsch writes.
In a radio report by Marketplace's David Gura, some economists explain how inflation helps borrowers and governments, who get to pay back their loans with "cheaper dollars." But another economist warns that inflation is hard to manage. "Inflation doesn't die," Marvin Goodfriend tells Gura. "It's like a vampire." One commenter on the page complains: "A little bit of inflation isn't good just like a little bit of cancer isn't good. The degree to which it helps borrowers is the same degree to which it hurts the saver on the other side."
Bob McTeer, a former head of the Federal Reserve Bank of Dallas, writes in this post at Forbes.com that it makes him cringe when Fed officials talk about wanting inflation. "A 2 percent inflation rate -- the Fed's target -- reduces the purchasing power of $50,000 to $30,477 in 25 years. That doesn't look so benign to me," McTeer says. He says he understands the arguments that the inflation to fear is when it is high and unexpected and that too-low inflation risks crippling deflation. "The Japanese experience has taught us that we don't want to go there. But, wouldn't 1 percent be a sufficient buffer?"
How about 5 percent? "It isn't clear that a low and stable inflation rate of 5 percent is really any more problematic than a low and stable inflation rate of 2 percent," says an older article at Economist.com, "Are falling prices good news?" The article argues inflation is good: "While a seemingly substantial output gap remains, higher inflation corresponds to faster recovery -- and lower inflation to slower recovery. Rapid disinflation is no call for sighs of relief, in other words. It's reason for concern."
"Inflation is only beneficial to those of us who borrow money and that's quite a few," says this post by blogger Steve McDowell at a U.K. site, Moneywise.co.uk.
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