Is Inflation bad?

Srivatsan Jumbunathan

Inflation need not always be a bad thing, as small amounts of it are necessary for the economic growth of a country. But before diving into this issue, let’s look at the definition of inflation. The economic definition of inflation is “a general increase in prices and fall in the purchasing value of money”. Thus, inflation occurs when the money circulating is more than the available goods and services. In general, there are three factors which can cause inflation. These factors are supply (cost-push) and demand-pull, and money supply expansion. Turkey is a country which is experiencing harsh inflation, with it increasing to 48.7% in January 2022, a steep rise from 36% in December 2021.

Most economists prefer low and stable rates of inflation. Low inflation lessens the severity of recessions, as it enables the labor market to adjust more efficiently. This therefore reduces the risk of a monetary policy not being able to stabilize the economy. This is usually handled by monetary authorities of the various countries. These are usually central banks of the countries, with some examples being the Monetary Authority of Singapore (MAS) and the Central Bank of the Republic of Turkey. Additionally, inflation and unemployment have an inverse relationship. So, inflation may not be as bad as people think it will be, with regards to the labor market and employment levels in the country, considering how inflation may lead to a reduction in the natural rate of unemployment in the short run.

However, it does not mean that inflation is entirely good. If it is not taken care of properly, it can lead to hyper-inflation. Hyper-inflation can wreak havoc in an economy. If inflation gets out of hand, it creates a vicious cycle, where rising inflation leads to higher inflation expectations, which in turn pushes prices even higher. Hyper-inflation can erase the savings of the middle-class population, and wealth and income is redistributed towards those with debt and assets and property. This incentivises the citizens of the country to spend their money since holding the money makes no sense as the value of money constantly decreases. This then increases the velocity of money flow. More money spent translates to a lesser amount to save. This then reduces the amount of loanable funds, and the expected rate of return decreases. Thus, sustained economic growth is unlikely to occur.

In conclusion, the effects of inflation can only be determined through the efforts of the government. Turkey is currently looking to ease the inflationary pressure by increasing tourism in the country. This helps with the recovery of the country in the long-term. The argument can be made that inflation causes more struggles, as families are struggling to buy necessities for the households, which ultimately decreases the standard of living. Hence, to answer this question with a ‘Yes’ or ‘No’ is not possible, and a set level of inflation should be established by the government at about 2% to ensure that it is not too high or too low.

References

Craig, Victoria. “Can Tourism Ease the Inflation Pressure in Turkey?” BBC News, 2022, sec. Business. https://www.bbc.com/news/business-60262964. (Accessed April 1, 2022).

Kenton, Will. “Hyperinflation.” Investopedia, 2019. https://www.investopedia.com/terms/h/hyperinflation.asp. (Accessed April 1, 2022).