What Does Inflation Mean?
Having to go into crisis mode during the start of the 2020 Pandemic, most economies around the world are now feeling the after effects of the initial onset of the 2020 Pandemic. Although things have settled somewhat, one should understand that the Pandemic is not over. However, some economies are experiencing inflation. This leaves many to wonder for the first time and truly think about what inflation actually is and how it affects them personally. To go straight to the point, inflation is a general increase or rise in an economy’s price level. Fewer goods and services are able to be bought with the different units of currency. Simply put, it is a decrease in purchasing power, that is, the purchasing power per the unit of money. Most consumers get truly concerned once the word inflation begins to float around as it is often seen as a not so good thing. However, Alexander Djerassi believes it is crucial to the economy. Many economists place inflation in both a positive light and a negative light. Let’s take a look at some of the positives and negatives.
Inflation casts a negative light in regards to the fact that the opportunity cost of holding money increases. In addition, because there is an uncertainty of the future of inflation, a discouragement of investing and saving tend to arise. Hoarding among consumers begins to take place, if inflation is rapid as the consumer begins to stockpile in fear of the increasing costs. This results in shortages of goods. And, this alone can cause consumers to truly go into panic mode. A simple but more recent example of hoarding was the Pandemic itself as people began to make things simply disappear off the shelves in grocery stores in order to stockpile their homes in fear of stores closing and not being able to go out due to the Pandemic. This is the same if one thinks prices are about to rise.
Many feel that a positive in reference to inflation is that unemployment is usually decreased in relation to the nominal wage rigidity. This in turn gives the banks freedom to follow monetary policy which include encouraging loans and investing. This is a positive because it gets the consumers and investors encouraged to work the markets and not hoard money. Many economists believe that inflation at a low and steady rate can decrease the harsh effects of an economic recession. This enables the labor market and workforce to adjust faster in an economic downturn. In addition, inflation can help reduce the risk and chance that traps of liquidity that can prevent monetary policy from helping to stabilize the economy. Monetary authorities are usually charged with the responsibility of keeping inflation at a low, stable and steady rate. In general, central banks are the monetary authorities that control interest rates which is monetary policy among other things.
One can conclude that Alexander Djerassi has a point in believing that inflation is crucial to the economy based on the positives and negatives.