Low inflation is considered the least bad option as both high inflation and deflation cause significant economic dislocation.
Pros of inflation:
- Low to moderate inflation can stimulate economic growth by encouraging spending and investment. When prices are expected to rise in the future, consumers and businesses may be more inclined to make purchases and investments now, rather than waiting for prices to increase.
- Inflation can also help reduce unemployment by encouraging businesses to hire more workers to meet increased demand for goods and services.
- Inflation can also reduce the burden of debt for borrowers, as the value of the debt decreases relative to the overall level of prices.
Cons of inflation:
- High inflation can lead to a decrease in purchasing power for consumers, as the same amount of money will buy less than it did before. This can lead to a decrease in living standards and an increase in poverty.
- High inflation can also lead to uncertainty and instability for businesses, as they may struggle to predict future prices and costs. This can lead to a decrease in investment and productivity.
- Inflation can also be regressive, disproportionately affecting low-income households and fixed-income groups like pensioners, who have less ability to adjust their spending in response to rising prices.
- High inflation can also lead to higher interest rates, as central banks attempt to control inflation by raising interest rates. This can make borrowing more expensive and decrease economic growth.
If you have cash savings or other investments that reduce in value during periods of high inflation you may want to speak to a financial advisor to make sure you retain your life savings
The effects of inflation are often not directly felt but are played out over a long time, especially long-term investments are vulnerable to inflation.
At Horizon65, we created a mobile app that enabled you to check the effect of inflation on your savings.