10 Pros and Cons of Inflation | UPSC
Why containing inflation, instead of boosting growth, could be the bigger challenge for policymakers in 2021
WHY IN NEWS:
Once this trend takes hold, as it did in 2011, it remains elevated for a prolonged period.
SYLLABUS COVERED: GS 3: Economy : Inflation
ON THE PATH OF RECOVERY
- Over the past few weeks, India seems to have broken the link between rising levels of mobility and COVID-19 cases.
- In fact, the number of new cases has fallen while the fatality rate continues to drop.
- The last quarter saw an improvement in growth as consumers were eager to spend, especially on festival-related items, bolstered by higher-than-usual financial savings.
- Inflation, in the basic sense, is a rise in price levels.
- Economists believe inflation comes about when the supply of money is greater than the demand for money.
- Inflation is viewed as a positive when it helps boost consumer demand and consumption, driving economic growth.
ADVANTAGES OF INFLATION
- Deflation is potentially very damaging to the economy and can lead to lower consumer spending and lower growth.
- A moderate inflation rate reduces the real value of debt.
- If there is deflation, the real value of debt increases leading to a squeeze on disposable incomes.
- Moderate rates of inflation allow prices to adjust and goods to attain their real price.
- Moderate rates of wage inflation, allow relative wages to adjust.
- Moderate rates of inflation are a sign of a healthy economy. With economic growth, we usually get a degree of inflation.
DISADVANTAGES OF INFLATION
- High inflation rates tend to cause uncertainty and confusion leading to less investment.
- It is argued that countries with persistently higher inflation, tend to have lower rates of investment and economic growth.
- Higher inflation leads to lower international competitiveness, leading to fewer exports and a deterioration in the current account balance of payments.
- Inflation and stagnant wage growth lead to declining incomes.
- Inflation will reduce the real value of government bonds.
- Investors will demand higher bond yields to compensate; this will increase the cost of debt interest payments.
- Hyper-inflation can destroy an economy.
- If inflation gets out of hand, it can create a vicious cycle, where rising inflation, causes higher inflation expectations, which in turn pushes prices even higher.
- Hyper-inflation can wipe out the savings of the middle-classes, and redistribute wealth and income towards those with debt and assets and property.
- For individual, all this could impact demand over time.
- A deeper look suggests that the low level of fiscal spending could leave behind other problems, such as rising inequality and inflation.It could stoke inflation.
- India has had trouble in the past with rising prices of services.
- To restore price stability, Governments/Central Banks need to pursue deflationary fiscal/monetary policy
- The cost of reducing inflation – is unemployment, at least in the short-term.
SOURCES: IE | 10 Pros and Cons of Inflation | UPSC