Inflation is a gradual increase in general price level of goods and services in an economy without a rise in people’s income. In inflation, the increase in money flow chasing the same amount of goods is the reason why there is an increase in price level. The effects of inflation is huge as it decreases purchasing power of the people, that is, Quantity of goods that a person could buy for a certain amount decreases due to reduction in purchasing power of the people as there is no change in income. Inflation is generally portrayed in a bad light while mild inflation can be really good for the economy. The government tries to keep the level of inflation at 2% to increase economic growth. Many countries try to rise inflation level a little so that it benefits their economy but severe inflation weave a havoc in the economy.
The advantages of inflation:
1. Inflation can boost economic growth. People may prepone their purchases as they anticipate further rise in the prices of goods. Therefore, the people do not want to delay their purchase which in turn increases economic growth. As the sale and purchase of goods and service increase, more income is also generated.
2. Inflation is said to increase employment levels. As seen people try and purchase goods sooner rather than delaying the purchase as they fear price hike in future as a result, producers produce more for which they employ more people. This increases employment and income levels in the economy.
3. Deflation is considered worse for an economy and having inflation removes the risk of deflation. In deflation, the price of goods fall and demand decreases due to which producers curb production and cut employees off. Deflation creates unemployment and income levels reduce which makes is harmful for the economy.
4. Inflation can be beneficial for lenders and borrowers too depending on the circumstances. If the wages increase due to inflation, the borrower is benefited as the amount of money he owes to the lender remains the same but his income increases so he can pay the debt off with the extra money he is now earning. The lenders benefit when price increases as along with the goods and services become costly and people might resort to borrowing to meet the increased standard of living.
Thus, some amount of inflation is maintained by the government to avoid deflation and reap the benefits of mild amount of inflation and promote economic growth. If the rate of inflation increases above 2%, it becomes dangerous for the economy. The government has to take precautionary steps to maintain a certain level of inflation.