Inflation is an economics term that most of us hear a lot. There will often be news stories about how the government is working to keep inflation low. While this word is commonly used in the media there still be a bit confused as to what it actually means for us. We might also wonder why economists and governments are so eager to avoid inflation. This is an important idea in economics, but one that can cause confusion for the rest of us.
What is Inflation?
In economics inflation is used to describe a rise in the cost of goods and services over time. You may have noticed that some things tend to be a lot more expensive these days than they were a decade ago. Back in the eighties you could buy a couple of pints of beer for a quid, but now you would be lucky to get change from ten pounds. The reason for this rise in price is inflation. Most things will rise in price over time and this can lower the purchasing power of our income; this is why there are often demands for pay raises to keep in pace with this inflation. Sometimes inflation can get completely out of control; after the Second World War you needed a wheelbarrow full of German Currency to buy a loaf of bread there — this is called hyperinflation.
Why is Inflation Bad?
You might wonder why inflation is considered such a bad thing. After all, so long as our wages keep on going up then surely it isn’t going to make that much difference. The fact is though that inflation can have many negative consequences if it gets out of hand; here are just some of the negative consequences of inflation:
- When the prices of things rise it can make them less appealing to customers. Sales will fall and this will have a knock on effect of causing businesses to fail. When these businesses fail it will lead to unemployment and people will have even less money to spend on products — it becomes a vicious circle.
- When prices go up it means that workers will demand higher pay from their bosses. Providing higher pay can take a huge chunk out of profits and discouraged entrepreneurship. Investors are not going to risk their capital if they don’t think there is a good profit to be made.
- When inflation isn’t tightly controlled it tends to mean that a country will get into a ‘boom and bust’ cycle.
- If entrepreneurs are uncertain about where the economy is going they will be less likely to take risks and expand.
- When inflation is high a lot of people will cut back on their spending in the hope that prices will fall again later — this can lead to all types of problems.
As well as there being many negative consequences of inflation there can also be some positive effects. It might mean that overall debt is lowered because the real value of these debts won’t be as much. Generally speaking though, most experts agree that too much inflation is a bad thing and should be kept in check.
