Question

“Inflation is not all that bad”

NOTE:

1. examine THREE arguments for this statement “Inflation is not all that bad”.

2. Ensure that you provide an applicable example for EACH argument.

Answer 1

Inflation is good for wages:

Higher prices make it easier for businesses to raise wages. They also give employers the flexibility not to raise wages as much as inflation, but they still offer some kind of rise to their employees. Many businesses may be forced to cut salaries in a world of zero inflation. For morale, retention or efficiency, that would not be healthy. Inflation has been running ahead of wage rises for most of the last five years, but wages have also been rising thanks to inflation, even though the money is not going so far.

Inflation is good for Borrowers

Anyone with a mortgage or a loan profits from deflation because it has the effect of debt eroding. My father bought a house for £ 11,000 in the 1960s. But with inflation peaking at about 13 percent in the late 70s, his wages also rising steadily–ensuring that mortgage repayments took an ever smaller share of his profits. By contrast, the real value of debts is increased by deflation-or falling prices. There's no good place to be.

Inflation is good for Government

The government has an enormous debt, which is growing thanks to a £ 90bn deficit. It'd like to see that reduced by inflation, which in effect would see a spike in its own profits. Tax revenue should increase as long as there is a good dose of inflation in the system, even if the economy is stagnant.

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