Not Really The Best Economic Description Of Why Inflation Is Desirable


It would appear that the United States also suffers from that overexpansion of the universities. It not so much being that there’s not a sufficient portion of the population that will benefit from an academic finishing off but that there aren’t enough people bright enough to teach at them. You know, the difficulty of getting the staff these days.

It is indeed possible to make a case for society having a modicum of inflation. But that case isn’t this one:

A moderate amount of inflation is generally considered to be a sign of a healthy economy, because as the economy grows, demand for stuff increases. This increase in demand pushes prices a little higher as suppliers try to create more of the thing that consumers and businesses want to buy. Workers benefit because this economic growth drives an increase in demand for labor, and as a result, wages usually increase. Finally, these workers with higher wages go out and buy more stuff, and so this “virtuous” cycle continues. Inflation isn’t really causing all this to happen – it is merely the symptom of a healthy, growing economy.

No, really, just no. Economic growth can happen with stable prices. It did for a couple of centuries after all.

The argument in favour of modest inflation is that we humans really just hate a fall in our nominal wages. Keynes made certain observations on the subject. We will, however, put up with a fall in our real wages if nominal are still static. And the thing is about a healthy, growing, economy is that wages for certain occupations should be falling in real terms. That’s how we get the movement of labour out of those old things and into the new and more vibrant.

So, we need to be having falling real wages in those old jobs so as to encourage the move to the new. But we can’t do this by having falling nominal wages because Revolution! Thus, have a bit of inflation – 1 or 2% is just fine, real wages rarely change much faster than that – so that we get the incentive in the real wages without the riots of falls in nominal wages.

Unlike many news organisations, we chose an approach that means all our reporting is free and available for everyone. We need your support to keep delivering quality journalism, to maintain our openness and to protect our precious independence. Every reader contribution, big or small, is so valuable.
For as little as £1 (£10 if you were at OxBridge) you can support us – and it only takes a minute. Thank you.

Click Here To Make A Contribution - Tim & The Team