Q:

Why is inflation both good and bad?

A:

Quick Answer

Inflation at an acceptable low stable rate is good because it increases economic output and productivity while generating employment opportunities. Inflation at extremely high levels, also known as runaway inflation, is bad because essential goods and services become too expensive and unemployment increases, which destabilizes the economy.

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Full Answer

Deflation is bad for an economy as it keeps prices at low levels, reduces employment opportunities and increases the debt burden on consumers. With a stable, low inflation rate, producers hire more workers to increase output resulting in wage increases for workers. The Federal Reserve Bank has the role of controlling inflation and creating employment opportunities. It aims for an inflation target of 2 percent, which is the optimal inflation rate for a stable economy, according to policy makers. Increased inflation affects consumers directly in the form of higher prices for food and gas, which families need and use on a daily basis.

Some critics of moderate inflation claim the government maintains a stable inflation rate in order to borrow and repay public debts at a cheaper rate in the future. The critics of inflation argue it is bad for the economy because it reduces the value of currency, while the value of goods and services remains the same. Dissenters say prices in a stable economy should fall due to increased productivity and technological advancements.

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