In a new post published Monday, an MSNBC opinion columnist attempts to portray the current inflation issue as a “positive thing,” calling the coronavirus outbreak a “unlikely hero.”
James Surowiecki began his column by accusing the media of fearmongering about the effects of inflation on Americans, citing a “odd” CNN segment that highlighted the impact of rising milk costs for a family of nine buying 12 gallons a week rather than a normal-sized family, writing “the segment succumbed to one of the media’s worst tendencies: taking a real issue and overhyping it beyond recognition,” accusing the network of “frightening” the public.
DURING A SUPPLY CHAIN CRISIS, THE ATLANTIC GOES AFTER “AFFLUENT AMERICANS” WHO ARE “BUYING UP THINGS THEY DON’T NEED.”
“Any examination of inflation must take into account the circumstances in which it occurs. Recessions have historically left Americans poorer, not better off. The Covid recession, on the other hand, was unique “Surowiecki penned a piece. “People substantially changed their habits in response to the pandemic, spending much less and saving much more. Despite the fact that millions of Americans lost their jobs, many of them were better off as a result of increased unemployment benefits and stimulus payments. And, after first plummeting, the stock market soared.”
Why is it that inflation is a good thing?
- Inflation, according to economists, occurs when the supply of money exceeds the demand for it.
- When inflation helps to raise consumer demand and consumption, which drives economic growth, it is considered as a positive.
- Some people believe inflation is necessary to prevent deflation, while others say it is a drag on the economy.
- Some inflation, according to John Maynard Keynes, helps to avoid the Paradox of Thrift, or postponed consumption.
Who gains from unexpected price increases?
Unexpected inflation hurts lenders since the money they are paid back has less purchasing power than the money they lent out. Unexpected inflation benefits borrowers since the money they repay is worth less than the money they borrowed.
Is lower inflation a good thing?
- Inflation, or the gradual increase in the price of goods and services over time, has a variety of positive and negative consequences.
- Inflation reduces purchasing power, or the amount of something that can be bought with money.
- Because inflation reduces the purchasing power of currency, customers are encouraged to spend and store up on products that depreciate more slowly.
In what ways is inflation beneficial to the economy?
Inflation is and has been a contentious topic in economics. Even the term “inflation” has diverse connotations depending on the situation. Many economists, businesspeople, and politicians believe that mild inflation is necessary to stimulate consumer spending, presuming that higher levels of expenditure are necessary for economic progress.
How Can Inflation Be Good For The Economy?
The Federal Reserve usually sets an annual rate of inflation for the United States, believing that a gradually rising price level makes businesses successful and stops customers from waiting for lower costs before buying. In fact, some people argue that the primary purpose of inflation is to avert deflation.
Others, on the other hand, feel that inflation is little, if not a net negative on the economy. Rising costs make saving more difficult, forcing people to pursue riskier investing techniques in order to grow or keep their wealth. Some argue that inflation enriches some businesses or individuals while hurting the majority.
The Federal Reserve aims for 2% annual inflation, thinking that gradual price rises help businesses stay profitable.
Understanding Inflation
The term “inflation” is frequently used to characterize the economic impact of rising oil or food prices. If the price of oil rises from $75 to $100 per barrel, for example, input prices for firms would rise, as will transportation expenses for everyone. As a result, many other prices may rise as well.
Most economists, however, believe that the actual meaning of inflation is slightly different. Inflation is a result of the supply and demand for money, which means that generating more dollars reduces the value of each dollar, causing the overall price level to rise.
When Inflation Is Good
When the economy isn’t operating at full capacity, which means there’s unsold labor or resources, inflation can theoretically assist boost output. More money means higher spending, which corresponds to more aggregated demand. As a result of increased demand, more production is required to supply that need.
To avoid the Paradox of Thrift, British economist John Maynard Keynes argued that some inflation was required. According to this theory, if consumer prices are allowed to decline steadily as a result of the country’s increased productivity, consumers learn to postpone purchases in order to get a better deal. This paradox has the net effect of lowering aggregate demand, resulting in lower production, layoffs, and a faltering economy.
Inflation also helps borrowers by allowing them to repay their loans with less valuable money than they borrowed. This fosters borrowing and lending, which boosts expenditure across the board. The fact that the United States is the world’s greatest debtor, and inflation serves to ease the shock of its vast debt, is perhaps most crucial to the Federal Reserve.
Economists used to believe that inflation and unemployment had an inverse connection, and that rising unemployment could be combated by increasing inflation. The renowned Phillips curve defined this relationship. When the United States faced stagflation in the 1970s, the Phillips curve was severely discredited.
What are the benefits and drawbacks of inflation?
Do you need help comprehending inflation and its good and negative repercussions if you’re studying HSC Economics? Continue reading to learn more!
Inflation is described as a long-term increase in the general level of prices in the economy. It has a disproportionately unfavorable impact on economic decision-making and lowers purchasing power. It does, however, have one positive effect: it prevents deflation.
What will be the rate of inflation in 2021?
According to Labor Department data released Wednesday, the consumer price index increased by 7% in 2021, the highest 12-month gain since June 1982. The closely watched inflation indicator increased by 0.5 percent in November, beating expectations.
Who is the most benefited by inflation?
Inflation Benefits Whom? While inflation provides minimal benefit to consumers, it can provide a boost to investors who hold assets in inflation-affected countries. If energy costs rise, for example, investors who own stock in energy businesses may see their stock values climb as well.
What would happen if inflation didn’t exist?
If there is no increase in inflation (or if inflation is zero), the economy may go into deflation. Reduced pricing equals less production and lower pay, which pushes prices to fall even more, resulting in even lower wages, and so on.
What industries profit from inflation?
If the economy becomes too hot, demand will outstrip supply, resulting in even higher inflation. And what if increased inflation expectations and interest rates result from this? For equity investors, things may start to fall apart. Consumer confidence is harmed by high and growing inflation. Consumers are concerned that their dollar will not stretch as far, so they begin to cut back on their purchasing. Companies’ input, labor, and capital costs rise, but they can no longer pass these costs on to customers. As a result, corporate margins are squeezed, and future cash flows are discounted back to the present at higher discount rates, resulting in lower stock prices. This is what investors are afraid about since the market expects our economy to go in this direction.
True, high and growing inflation can be a drag on the stock market. However, some industries are more adept at controlling inflation than others.
Sectors that can manage rising input costs by passing on higher pricing to consumers fare well during higher inflationary periods. In this category, the energy sector shines out. This makes sense because energy corporations’ income is linked to the price of oil, and increased oil prices are passed on to customers. Because financials are positively connected with interest rates, tightening monetary policy to handle greater inflation could help financials. Consumer staples also tend to keep their value in an inflationary environment because demand for staples is inelastic.
On the other side, when inflation remains stubbornly high, sectors like technology and consumer discretionary perform poorly. Many technology firms have significant growth potential but poor current earnings and cash flows. When cash flows that may be generated in the future are discounted back to present value at a greater discount rate, the current intrinsic value of the company’s stock is reduced. When inflation takes a bite out of a consumer’s wallet, the first expenses to be slashed are the discretionary, or non-essential, ones. Consumer discretionary companies’ revenues and profitability suffer as a result, and their stock prices suffer as a result.
Many of the fundamental components of the recent inflation increase are temporary and could mean reverse. Furthermore, simple arithmetic implies that once the pandemic restart’s surge in activity and prices has been fully captured, and we return to a more typical economic situation, base effects will lead the hot inflation readings to moderate. However, as we’ve seen in this economic cycle, some sticky components of inflation have risen as well (e.g., wages and housing prices).
In the past, value companies have profited more than growth stocks from strong inflation that may slow to above-average rates. The sector rotation has already begun to show this. Energy and financials have outperformed year-to-date, while interest rate-sensitive sectors including technology, communication services, and real estate have underperformed.
Value stocks have been out of favor for a long time, with the exception of intermittent periods of outperformance. They’re finally getting their day in the sun, which may last a little longer this time due to increasing inflation and interest rates. This condition, paired with more appealing valuations, may help these sectors maintain their progress.
As a result, it’s critical to recognize that rising inflation and interest rates can be a drag on equities investors. While inflation, inflation expectations, and rising interest rates are all in play, some industries are better positioned for these dynamics and may outperform.
What effect does inflation have?
The entire economy is impacted when energy, food, commodities, and other goods and services costs rise. Inflation affects the cost of living, the cost of doing business, the cost of borrowing money, mortgages, corporate and government bond yields, and virtually every other aspect of the economy.