Why do people dislike inflation

Frederic Mishkin (2007) defines inflation as the condition of a continually and rapidly rising price level. Inflation is a phenomenon whereby too much money is chasing too few goods thereby reducing the value of money versus the increased value of goods. Studies show that inflation is the most common economic term used by the general public. We hear about inflation in the news, in political speeches, in seminars, and even in coffee shops. But why do people dislike inflation?

Contrary to popular believe, inflation is not simply a one time increase in price levels but a process that happens continuously. People normally view inflation as the cause of a lower purchasing power of their hard earned cash which would ultimately result in a lower standard of living (people must forgo the consumption of certain optional goods for example, an iPod due to the increased prices of necessities). However, this perception of inflation is not completely accurate because certain individuals may experience increase in wages that offset any loss of purchasing power due to inflation.

Furthermore, some economists believe that since inflation normally comes together with economic growth, it may lead to an increase in real income at the end of the day. Therefore inflation is not the sole cause that erodes an individual’s standard of living (though many of us think so). But one fact stands out more obvious than any other and that is that inflation does not affect all of us equally. When you take income levels into consideration, inflation normally hit the hardest on the poor rather than the rich.

A retired person or any unemployed individual is very likely to be hit by inflation on a larger scale than a higher income earning individual (assuming the higher paid individual’s income rises in tandem or faster than price levels). This is because the unemployed individual is relying on his/her money kept in the bank which value, due to inflation is eroding. Without the chance of benefiting from any economic growth in the society, the unemployed individual is stuck with a higher cost of living without any compensation in any form.

Inflation has recently become one of the hottest topics discussed by central bankers around the world. A low and stable inflation rate is the goal of most central banks today as it fosters lower economic uncertainty and higher long term economic growth. Milton Friedman’s success in proving the flaw in the Philip curve (a graph that shows the relationship between inflation and unemployment rate) has also shown the world that lower unemployment cannot be ‘bought’ by higher inflation (most commonly achieved through excessive government spending that stimulates demand). Yet despite so, inflation continues to be a major issue to every individual.

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