Why is Inflation bad?
In: 0
I can buy a lemon for $1 today. I have $100 in my savings. For my $100, I can buy 100 lemons.
Inflation happens, and lemons now cost $2. The amount of money I saved hasn’t changed, but now I can only buy 50 lemons. Without doing anything, I’ve essentially “lost” money. That’s why massive inflation is bad.
A little inflation isn’t actually a bad thing for an economy. If your money is constantly “losing value,” you’re more likely to spend it or invest it in stocks that will grow faster than inflation.
Inflation in general is when money today is less valuable than money yesterday, so anything that has a fixed amount over a period of time will be impacted by inflation. That means loans and savings. If your cash is in a savings account and inflation hits at 100% (for example), even though your savings didn’t move, you just lost half the value of that account. This is terrible for people who save a lot, and especially for those close to retiring, or already retired, since they thought they were set living off a fixed income. Well, that fixed income basically just got cut in half.
On the other side, there’s loans and debt. I bought my house right before the pandemic, and lucky me. The loan is set in stone, it doesn’t adjust to inflation, so basically the value on my loan went down while the value of my house when up, and all that difference is profit for me (even if that profit also suffers from inflation). So savings gets diminished, but so too does debt, so when you expect inflation, it’s much better to have debt than to have savings. Lowered debt is great for many people, but until wages catch up, it might not be felt. Plus, it’s terrible for banks, and you might be in a position where the health of banks is tied to your own finances, investments and such.
Additionally, inflation at extreme levels can have effects that aren’t felt year to year, or month to month, but even day to day, or hour to hour. In extreme cases like these, you might get paid on friday, and that paycheck might lose most it’s buying value by the time you have a chance to spend it. That’s extreme though, still, it has happened quite a few times.
Overall, inflation is a change in the value of money, and that has big effects on financials for obvious reasons. The larger the amounts, the stronger that impact becomes.
A little inflation is good, as it lightly coerces people to spend (to beat price increases) or invest (to beat inflation).
Too much inflation is bad, as it outpaces people’s wage increases and thus reduces buying power, and it diminishes people’s savings (say, retirees who want safe returns over more volatile stock market investments)
As long as inflation effects everything at the same rate and at the same time, it’s not bad. If next year everything is twice as expensive as this year, but you make twice as much money, you’re not worse off.
The problem is that inflation doesn’t affect everything equally. People taking new jobs may get higher wages, but many people in their jobs will not get raises. Some prices (energy, food, etc.) will go up a lot, and other prices will not — someone who buys food and energy but sells a product that has not seen price increase will be worse off. People living off of savings in retirement will not see their savings increased, so they’re worse off. People who have loaned money will be owed the same amount in repayment, even if that money is now worth much less — that’s good for current borrowers, but lenders will likely increase interest rates to reflect inflation, so future borrowers will be worse off.
In short, there are many people who lose out and some people (like borrowers) who may benefit, and there’s a lot of chaos in the process.
Why is Inflation bad?
In: 0
I can buy a lemon for $1 today. I have $100 in my savings. For my $100, I can buy 100 lemons.
Inflation happens, and lemons now cost $2. The amount of money I saved hasn’t changed, but now I can only buy 50 lemons. Without doing anything, I’ve essentially “lost” money. That’s why massive inflation is bad.
A little inflation isn’t actually a bad thing for an economy. If your money is constantly “losing value,” you’re more likely to spend it or invest it in stocks that will grow faster than inflation.
Inflation in general is when money today is less valuable than money yesterday, so anything that has a fixed amount over a period of time will be impacted by inflation. That means loans and savings. If your cash is in a savings account and inflation hits at 100% (for example), even though your savings didn’t move, you just lost half the value of that account. This is terrible for people who save a lot, and especially for those close to retiring, or already retired, since they thought they were set living off a fixed income. Well, that fixed income basically just got cut in half.
On the other side, there’s loans and debt. I bought my house right before the pandemic, and lucky me. The loan is set in stone, it doesn’t adjust to inflation, so basically the value on my loan went down while the value of my house when up, and all that difference is profit for me (even if that profit also suffers from inflation). So savings gets diminished, but so too does debt, so when you expect inflation, it’s much better to have debt than to have savings. Lowered debt is great for many people, but until wages catch up, it might not be felt. Plus, it’s terrible for banks, and you might be in a position where the health of banks is tied to your own finances, investments and such.
Additionally, inflation at extreme levels can have effects that aren’t felt year to year, or month to month, but even day to day, or hour to hour. In extreme cases like these, you might get paid on friday, and that paycheck might lose most it’s buying value by the time you have a chance to spend it. That’s extreme though, still, it has happened quite a few times.
Overall, inflation is a change in the value of money, and that has big effects on financials for obvious reasons. The larger the amounts, the stronger that impact becomes.
A little inflation is good, as it lightly coerces people to spend (to beat price increases) or invest (to beat inflation).
Too much inflation is bad, as it outpaces people’s wage increases and thus reduces buying power, and it diminishes people’s savings (say, retirees who want safe returns over more volatile stock market investments)
As long as inflation effects everything at the same rate and at the same time, it’s not bad. If next year everything is twice as expensive as this year, but you make twice as much money, you’re not worse off.
The problem is that inflation doesn’t affect everything equally. People taking new jobs may get higher wages, but many people in their jobs will not get raises. Some prices (energy, food, etc.) will go up a lot, and other prices will not — someone who buys food and energy but sells a product that has not seen price increase will be worse off. People living off of savings in retirement will not see their savings increased, so they’re worse off. People who have loaned money will be owed the same amount in repayment, even if that money is now worth much less — that’s good for current borrowers, but lenders will likely increase interest rates to reflect inflation, so future borrowers will be worse off.
In short, there are many people who lose out and some people (like borrowers) who may benefit, and there’s a lot of chaos in the process.
Latest Answers