Is Inflation Harmful

Q. Should the Government be concerned if the CPI rises to 5% ?

The Govt set the MPC a target for CPI of 2% +/-1 therefore it believes inflation higher than 3% is potentially damaging for the economy.

It depends on inflation in other countries. If inflation in the UK is higher than elsewhere then UK goods will become uncompetitive leading to a fall in demand for UK exports.

If there is a fall in demand for Exports then there may be a deficit on the current account Balance of Payments. However this may be offset by a devaluation that is likely to occur

However if inflation is high there will be a devaluation of the exchange rate, This is something the govt wishes to avoid as it creates uncertainty amongst business.

Higher rates of inflation may cause menu costs, which means firms have to change price lists quite often. However this is not that significant when inflation is only 5%.

If inflation is caused by unsustainable economic growth then the boom may be followed by a recession . To keep inflation within target the Bof E will have to increase interest rates, this causes problems because AD will fall causing lower growth.

Higher rates of inflation are disliked by business because it makes it more difficult to predict future costs. Therefore investment will be lower, Countries with lower inflation rates generally have poorer economic growth.

A high rate of inflation would make it more difficult to join the EURO, because it would breach the Maastricht criteria. If inflation in the UK was higher than Europe a single Monetary policy would be ineffective for the UK

If the inflation was world wide caused by an increase in the oil price, it may be necessary to revise the inflation target of 2.5% . The UK would not lose its competitive advantage because every country would have higher inflation. TO reduce inflation would cause stagflation (lower growth and lower prices)

Inflation may cause redistribution of income from savers to borrowers, although this will depend upon the rate of interest. E.g. if interest rate were 8% savers would still have a real interest rate of 3% It depends on whether wages are keeping up with inflation. If wages were only increasing by 4% then real wages would be falling.

Should the govt be concerned with inflation falling below 2%?

If prices are falling because AS shifts to the right because of new technology, this is beneficial for the economy, because growth is increasing and jobs being created

If deflation is cause by falling AD then this is serious economic problem because it indicates a recession with problems such as unemployment, lower output and a negative multiplier effect

Deflation can cause problems for the economy. It means that those who have debts will see the real value of debts increase, this will lead to lower consumer confidence and possibly lower AD and economic growth

Deflation makes monetary policy ineffective. This is because interest rates cannot be reduced below 0%.

Companies cannot alter real wages easily because workers are very resistant to any cut in nominal wage wages.

It is more difficult to set prices when there is deflation

- Richard Pettinger 1/12/2002

Copyright (c) Richard Pettinger

http://www.richardpettinger.com/

---

End Time Clock Ticking Away?

Earlier this month, I heard President George W. Bush and... Read More

Seven Things That Make Me Angry

I watch the TV news and I get angry. I... Read More

Russian State Administration Gives New Facelift to Oil and Energy Resources

With the world's largest oil and natural gas reserves, second... Read More

Will Cloning of Super Families Lead to Slavery

If slavery has not worked well, then cloning if it... Read More

FTC Hurts Franchising Consumers

Last Summer the Federal Trade Commission came out with a... Read More

Al-Qaida has Nukes

Many believe Al-Qaida already has nukes in the United States... Read More

The Pilgrims and Beacon Hill Mob

In 1966, Dr. Carroll Quigley, a professor of history at... Read More

America Needs Election Reform to Ensure Congressional Honesty

America must implement a policy on Election Reform that is... Read More

Minor Disruptions Cause Chaos in Transportation

Recently the Los Angeles Transit workers are on Strike and... Read More

Wealth Distribution and Inheritance, What Will They Buy? Cars

Wealth Distribution is often discussed at length in periodicals such... Read More

UK Elections on the Horizon

With elections on the horizon and Blair looking tired and... Read More

Tax Dollars and Transparency of Government Agencies

As we watch fewer Americans voting it is no wonder... Read More

The FTC Purports and Misrepresents Their Law Enforcement Experience as It Attacks Business

We should all give much kudos to the Federal Trade... Read More

New York Lawyers; Vindictive Government Prosecutors

We all know Elliot Spitzer is going to run for... Read More

Silicon Valley Brain Drain; Bad Trade Policies, Why?

We have brain drain issues in Silicon Valley, we have... Read More

Mental Masturbation of FTC Franchise Rule Report

Please read through this quick thought and discussion as if... Read More

Fight Terror, With Education

A War on Terrorism? Conventional war being brought on an... Read More

Stopping a Nuclear Bomb on a Hydrofoil

The US Homeland Security is worried about Hydrofoil or Skimmer... Read More

Transporting Troops in the Future

Currently when we transport troops we use large cargo planes... Read More

Liberal Agenda and Communism; Lance Rants

If we go hog wild towards the liberal agenda where... Read More

Army Recruiting Dilemma Discussed

Currently the US Army is having trouble recruiting. These problems... Read More

Bosnia - An Economy in Search of a State

Bosnia-Herzegovina (heretofore "Bosnia") is an artificial polity with four, tangentially... Read More

Internet in Russia and Ukraine - Part 1. General Information and Statistics

User BaseThe non-US and non-English Web segments have been boosted... Read More

Some Farmers and Organic Growers are Upset at Monsanto

The organic farmers are angry that Monsantos terminator GM seeds... Read More

Self Destruct Strategies in UAV Construction

All UAVs Need a Self Destruct BLOS DeviceWhat do you... Read More

Wars, Oil and Trade Conflicts of the Human Race

Many in the World Media are quick to judge the... Read More

Water Conservation, Retention and Better Policies

As the populations expand in Colorado outside of Denver, Las... Read More

Feeling Squeezed by Political Correctness

I'm starting to feel squeezed by all the political correctness... Read More

How Small Business Benefits From Supporting Labor Unions

For a short time I worked as a union officer... Read More

Tracking Over The Road Trucks from Canada

Are you happy with all this so-called security after 9-11?... Read More

How Futuristic Is Anarchy As A Way To Organize The State (I)

When organising a country or a group of people in... Read More

A Workable Alternative to Term Limits

The end of another election once again brings into focus... Read More

The Wage-Productivity Gap

The most damaging factor to our economy today is the... Read More