What are the pros and cons of inflation?
In: 1
Pros:
– Makes debt less expensive to service. Debt stays the same, so if your wages go up then the debt is a smaller portion of your income.
– Encourages spending, which is good for the economy. If things get more expensive over time, then you are encouraged to spend today
– Punishes uninvested money. You need to put your money out there to earn something so it doesn’t lose value. This allows that money to be invested.
– Protects against deflation. Deflation is really, really bad – so bad we need to protect against it at all costs.
Cons:
– Punishes people whose wages don’t increase. This one is obvious – goods get more expensive.
– Makes debt less valuable. If you own debt, then what you own is less valuable over time.
– Hurts “stagnant” money, like checking and savings accounts.
Pros:
– It incentivizes spending
– It acts as a buffer against deflation
Cons:
– Wages can’t always keep up with it, leading to lower real wages
Hmm.
Pros:
Destroys wealth stored in banks and long-term currency denominated contracts. If you want anarchy, inflation can get that done.
Cons:
Hurts workers be making their paychecks buy less.
Hurts investors or anyone with with long-term contracts.
Pros: your debts reduce in real terms. If you earn £3,000 a year and have a mortgage for £9,000 that’s a lot of debt that’s going to take you 25 years to pay off. But ten years of wage inflation and now you earn £9,000 a year but your mortgage is still only £8,000 (you’ve paid some off in those ten years). Now you can pay it off easily.
Cons: Your savings fall in value. You have £9000 in the bank earning you 5% interest – so each year you get £450 – which is enough to buy you a nice holiday. Now you get inflation at 10% and while you are still getting £450 each year, that holiday now costs £500, £550, £605 over the next three years.
Basically, if wages keep roughly in line with inflation, then inflation is good for poor people with debts and very bad for rich people with savings.
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