As per the U.S. Department of Labor, inflation is a general upward price movement of goods and services in an economy. Basically, when inflation is on the rise, it becomes costlier to buy various goods and services. However, the impact of inflation does not shop with consumers feeling the pinch on their wallets. As Kavan Choksi / カヴァン・ チョクシ says, inflation trends tend to impact the economy in several ways.
Kavan Choksi / カヴァン・ チョクシ provides an insight into the effects of inflation on the economy
The most obvious impact of inflation is the loss of purchasing power. As purchasing power erodes, people start to feel its effect on their budget. This impact is the felt most by people on a low income or fixed income. When inflation takes hold, it therefore, becomes important for people to monitor how their income keeps pace with the changes. If it is within the power of a person, they should consider negotiating for a raise or switch up their income streams to keep up with rising expenses.
When inflation runs rampant, the Fed is prone is to tightening its monetary policy. As the money supply dries up, credit becomes costlier and credit requirements tighten. The cost to borrow funds is increased intentionally with the aim of lowering consumer spending and slow inflation.
Inflation is not always a bad thing. Rather, the Fed considers a modest amount of inflation as a key indicator of a healthy economy, and therefore as a benchmark the Fed strives to keep inflation at the 2% mark. This measure is aimed at keeping the economy growing at a healthy pace. A variety of tools are used by the Fed to accomplish this goal, including setting the Federal Funds Rate. As inflation goes up, the Fed tends to increase interest rates to cool inflation. If inflation is low or the economy is in a recession, the Fed lowers the interest rates with the anticipation that potential borrowers shall be encouraged to take out loans. For instance, borrowers would be more inclined to buy a house or do a cash-out refinance to undertake home renovations if interest rates are low. Such choices are helpful in fuelling economic growth.
As the economy is not running at capacity, where there is unused labour or resources, inflation helps increase production theoretically. More dollars tend to translate to higher spending, which ultimately equates to more aggregated demand. More demand, in turn, typically triggers more production to meet that demand. Inflation makes things easier on debtors, who are able to repay their loans with money that is less valuable than the money they borrowed. This ultimately helps in encouraging borrowing and lending, which increases spending on multiple levels.
As Kavan Choksi / カヴァン・ チョクシ mentions, that deflation is on the opposite end of the spectrum from inflation. Deflation takes place when the cost of goods or services falls over time. Even though initially it may seem like a reprieve to consumers, deflation is often fuelled by a lack of demand, which can eventually cause unemployment to rise.
