Inflation is, and has been, a highly debated phenomenon in economics. Even the use of the word "inflation" has different meanings in different contexts. Many economists, businessmen and politicians maintain that moderate inflation levels are needed to drive consumption, operating under the larger, overarching assumption that higher levels of spending are crucial for economic growth. The Federal Reserve typically targets an annual rate of inflation for the United States, believing that a slowly increasing price level keeps businesses profitable and prevents consumers from waiting for lower prices. There are some who believe the primary function of inflation is to prevent deflation.
Others, however, argue that inflation is less important and even a net drag on the economy. Rising prices make savings harder, driving individuals to engage in riskier investment strategies to increase or even maintain their wealth. Some claim that inflation benefits some businesses or individuals at the expense of most others.
Defining "Inflation"
You may hear the term "inflation" used to describe the impact of rising oil or food prices on the economy. For example, if the price of oil goes from $75 a barrel to $100 a barrel, input prices for businesses increase and transportation costs for everyone increase, and this may cause many other prices to rise in response. However, most economists describe a subtly different effect when they talk about inflation. Inflation is a function of the supply and demand for money, meaning that producing relatively more dollars causes each dollar to become less valuable, making the general price level rise.
Possible Benefits of Inflation
When the economy is not running at capacity, meaning there is unused labor or resources, inflation theoretically helps increase production. More dollars translates to more spending, which equates to more aggregated demand. More demand, in turn, triggers more production to meet that demand.
Read more: http://www.investopedia.com/ask/answers/111414/how-can-inflation-be-good-economy.asp#ixzz3fPpy4ueg
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Inflation is, and has been, a highly debated phenomenon in economics. Even the use of the word "inflation" has different meanings in different contexts. Many economists, businessmen and politicians maintain that moderate inflation levels are needed to drive consumption, operating under the larger, overarching assumption that higher levels of spending are crucial for economic growth. The Federal Reserve typically targets an annual rate of inflation for the United States, believing that a slowly increasing price level keeps businesses profitable and prevents consumers from waiting for lower prices. There are some who believe the primary function of inflation is to prevent deflation.Others, however, argue that inflation is less important and even a net drag on the economy. Rising prices make savings harder, driving individuals to engage in riskier investment strategies to increase or even maintain their wealth. Some claim that inflation benefits some businesses or individuals at the expense of most others.Defining "Inflation"You may hear the term "inflation" used to describe the impact of rising oil or food prices on the economy. For example, if the price of oil goes from $75 a barrel to $100 a barrel, input prices for businesses increase and transportation costs for everyone increase, and this may cause many other prices to rise in response. However, most economists describe a subtly different effect when they talk about inflation. Inflation is a function of the supply and demand for money, meaning that producing relatively more dollars causes each dollar to become less valuable, making the general price level rise.
Possible Benefits of Inflation
When the economy is not running at capacity, meaning there is unused labor or resources, inflation theoretically helps increase production. More dollars translates to more spending, which equates to more aggregated demand. More demand, in turn, triggers more production to meet that demand.
Read more: http://www.investopedia.com/ask/answers/111414/how-can-inflation-be-good-economy.asp#ixzz3fPpy4ueg
Follow us: @Investopedia on Twitter
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