Why Inflation Isn’t As Bad As You Think

Recently a friend asked me why anyone would want inflation.  Wouldn’t it be much better to have lower prices to look forward to? 

This becomes a frequently asked question in economic downturns, and the short answer is no.  If prices consistently decrease that’s called deflation, and it’s bad. 

Here’s what can happen when prices deflate:

• Looking forward to additional decreases in price, people start putting off purchases with the thought that items will be cheaper next month than this month. 
• Retail inventories increase until retailers stop buying from manufacturers and retail stores lay off their employees.  Sometimes stores close altogether.
• Next, manufacturers stop producing goods and start laying off employees.  Maybe some of them will close, too.
• Then raw goods producers stop production and start laying off their employees, and again, some close.
• Laid off workers stop buying because their income has disappeared. 
• At a national and/or global level, economies can come to a standstill; it’s called a depression.  Think of the 1930s.
• Prices eventually reach a low point.  The new problem on everyone’s mind is how to start an upward economic spiral.  Economists disagree on how to fix this problem. Some economists believe that the problem will correct itself after a while if nothing is done, but this usually takes a long, long time.Others say that the government should start spending on all sorts of public works programs to sort of “prime the pump.”This will put some people to work, and a sort of reverse domino effect will restore the economy.As people’s incomes are restored, they start to buy.The resulting increased demand leads to increased prices, or inflation. But this restoration process is also slow.

So, the next time you think reduced prices would be a really good thing, remember its possible consequences.

-Harold Sasnowitz-