This article explains that inflation that is too low can actually be harmful to an economy. The Fed usually aims to have inflation at about 2% a year-- a healthy amount for a growing job market and gradually rising wages. The article also reports that its been shown that some economies have actually performed at their best with a 3% inflation rate.
The article explains four main reasons that too low inflation is bad. 1) Companies that don't have any room to raise prices are more likely to cut costs which may result in job cuts and higher unemployment. 2) Low inflation does not motivate consumers to spend in a timely manner. 3) Low inflation doesn't act as a very helpful buffer against deflation and this can freeze up spending. Consumers will not spend when they expect goods to be cheaper in the future. And 4) low inflation brings low wage and revenue growth.
It seems to me that having low inflation is much better than the alternative. I'm not totally convinced from this article that addressing low inflation is a top priority right now, and we should be grateful it's not skyrocketing.
http://money.cnn.com/2013/04/19/news/economy/low-inflation-risks/index.html?iid=HP_LN
The article explains four main reasons that too low inflation is bad. 1) Companies that don't have any room to raise prices are more likely to cut costs which may result in job cuts and higher unemployment. 2) Low inflation does not motivate consumers to spend in a timely manner. 3) Low inflation doesn't act as a very helpful buffer against deflation and this can freeze up spending. Consumers will not spend when they expect goods to be cheaper in the future. And 4) low inflation brings low wage and revenue growth.
It seems to me that having low inflation is much better than the alternative. I'm not totally convinced from this article that addressing low inflation is a top priority right now, and we should be grateful it's not skyrocketing.
http://money.cnn.com/2013/04/19/news/economy/low-inflation-risks/index.html?iid=HP_LN
4 comments:
Inflation is a weird measure of the economy too high and it makes the dollar worthless and too low it doesn't allow business to function so it has to be at a safe median for the economy to perform at its best
The Federal Open Market Committee's press release from their last meeting said that they expect inflation in the next one and two years to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and "longer-term inflation expectations continue to be well anchored."
That committee is a lot smarter than I am, so if they feel inflation is under control I'll take their word for it.
I agree with Chris, but add that rising inflation will be a positive sign that the economy is picking up again.
I think that our current inflation rate is alright for now. The dollar is not valued very high as compared to other currencies currently and a dramatic increase in inflation would hurt us more in that area. With that being said, lowering inflation by much would also be a sign that we are not progressing out of the recession.
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