Advantages and Disadvantages of Inflation

Inflation refers to general rise in price of goods and services which in turn leads to dissatisfaction among the people of the country as nobody likes to pay more money for goods and services. Inflation is a double edged sword if used judiciously it can put country to the path of prosperity and if it goes out of control then it can lead to chaos and disaster for the country. Given below are the advantages and disadvantages of inflation –

Advantages of Inflation

  1. A mild or moderate inflation is good for the growth of economy because if there is no rise in price of goods or services than it can lead to deflation which presents different set of problems for the economy like recession or depression for the economy, vicious cycle of lower consumption and lower production due to fall in price of goods and services, unemployment and so on. Perhaps that is the reason why countries all over the world if given a choice between inflation and deflation would prefer inflation because inflation if kept under control can boost the growth of the economy.
  2. Inflation though indirectly can result in more productivity because when inflation rises companies tend to increase their production so as to earn more money and workers also work overtime because their real wage has fallen due to inflation and to counter inflation they have to increase their wages which can be done either through overtime work or doing side job after work.

Disadvantages of Inflation

  1. Inflation results in higher rate of interest as central banks try to reduce money supply by increasing interest rates which in turn result in higher rate of interest on loans and since majority of people and companies takes loans during their lifetime they suffer the most because of high interest burden on their debt.
  2. Inflation hurts fixed income groups like salaried class people, pensioners, savers and poor people the most because during inflation their purchasing power is being reduced due to fall in real value of money.
  3. Inflation makes the country products uncompetitive in international markets due to deprecation in currency which in turn leads to fall in exports putting further pressure on the economy foreign exchange reserves.
  4. Inflation if not controlled can lead to hyperinflation which is the worst case scenario as it may result in complete breakdown of economy as well as government leading to anarchy in the country.

As one can see from the above that inflation has advantages as well as disadvantages and it depend on the government whether it makes use of inflation for betterment of the country or it allow inflation to destroy countries growth.

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