Discuss the view that inflation is always harmful.

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Discuss the view that inflation is always a major problem?

High Inflation dampens the ability of governments to achieve their ultimate objective of enhancing their citizens’ wellbeing. It widens income inequalities between the rich and the poor, reduces the price competitiveness of goods and services leading to balance of payment problems, discourages savings and lending, causes economic and political instability etc. The true consequences of inflation however, depend on its rate, how old it is, whether it is anticipated or unanticipated and the inflation rates of other countries.

A rapid rate of inflation implies a sharp rise in the cost of living. Consequently relatively poor individuals or those belonging to low income classes suffer more than the rich. Fixed income earners, pension bearers and those deriving income from fixed interest securities etc. lose when price level rises. This is because they have lesser to spend in real terms or their purchasing power is eroded due to higher prices of goods and services. Businessmen on the other hand, can shift the burden of increased costs to consumers, particularly if the demand for their products is price inelastic.

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A country facing a comparatively high inflation rate experiences reduced price competitiveness of goods and services both at home and abroad. Exporters lose whereas importers’ businesses flourish from consumers wanting to spend more on decreased exports lead to a rising trade deficit, putting pressure on the economy inflation becomes a major problem for an economy if it results in a persistent trade deficit and drains national official reserves.

Higher inflation creates uncertainty and distortion which saps the underlying strength of the economy and causes steeper, more volatile business cycles. Costing and pricing decisions become even more difficult, forcing investors to ...

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