Positive Effects Of High Inflation

Q: Discuss the positive effects of high Inflation. In the following essay I am going to discuss and evaluate the positive effects of high inflation on an economy. Inflation is the sustained increase in average general price levels when cost of living becomes expensive, along with the value of money decreasing. Furthermore, the increase in price level reflects inflation and decrease in price means deflation. Firstly, inflation isn't as bad as deflation. Deflation is when prices are decreasing as compared to low inflation which is when price level is increasing at a slow rate. So, deflation on a macro level will lead to households postponing their consumption as they are anticipating prices to decrease day by day to get cheaper deals on goods and services. Therefore, if households postpone their spending, it will lead consumption to decrease, which is a direct component of Aggregate Demand overall resulting in Real Output to decrease. Deflation also leads to a recession within an economy as economic growth is extremely low. However, inflation isn't always seen as the best outcome in an economy especially expected inflation means that it is more likely that there will be a large amount of spending before price level goes up even further. Too much spending and economic boom would lead to the economy to go bust, and can even lead to a recession, or a possibly a depression. Disinflation is seen as a preferred outcome in an economy as although price level is increasing, it is doing so at a slower rate which is often good for an economy as it shows economic growth and people are able to save and spend money without restricting the amount that they spend. It shows stability in an economy. Another positive effect of inflation is that wealth inequality decreases; as we know, inflation causes the value of money to decrease, what this means is that rich lose the value of their wealth (Saving), and for the poor, it lowers the value of borrowing money. What this means is that it will decrease the gap between the rich and poor, creating a larger middle class. This is known as even distribution of wealth. This is a good thing for the poorer people of our economy, because it brings more opportunities for them to pay their money back quickly and also get out of the vicious circle of poverty. In addition to this, in the long run, equality leads to high economic development, and this is also a positive effect on the economy On the other hand, it can be argued that cost-push inflation actually causes unemployment, so it will actually increase the income gap between the rich and the poor. Furthermore, low eamers in the economy are more likely to get hit harder, as compared to the high earners in society. Large % of poor people income is spent to afford basic cost of living as compared to high earners. So inflation doesn't always have the best positive effects Finally, the last positive of inflation is that it may actually encourage firms to become more efficient in producing good's and services. This is because inflation leads to an increase in the cost of production for company's. This means firms will want to seek various ways to improve efficiency and cut costs wherever possible. Firms may also invest in technology to improve productivity. An example is that high wage pressure will encourage automation, meaning firms will get higher productivity and better quality from workers. Overall it may lower average costs and also increase international competiveness for the economy. Nevertheless, this is only if we assume that these firms can afford to invest in capital and new types of technology, to improve their efficiency. In addition, some firms may even choose to compromise with the quality of some products. Meaning that they won't actually be positive with the change in price levels. In conclusion, I believe that low inflation has many positive effects, however, there are a lot of arguments against the hyper-inflation or deflation. To conclude, I think that the most significant negative effect of high inflation is the increase of unemployment as this could ultimately lead to a budget deficit and the economy is less likely to develop. This is caused by cost push inflation, which I believe does more damage to the economy than demand pull inflation. As compared with demand pull inflation where at least growth is taking place.