Monday, September 23, 2013

Varieties of Inflation

To the consumer, it's inflation when the price of something we use gets more expensive. If it gets cheaper, we usually don't notice. That's why economists rely on more scientific characterizations.

General increases in prices have several kinds of causes. One is an unpredicted scarcity of crucial goods, like energy or food. Those are volatile, and don't say much about the general economy anyway, however unpeasant they are for the population. More general inflation is too much money chasing too few goods. That usually means that the economy is running at full capacity, and unemployment is very low - so that wages go up and drive the price of everything else up.

The great bugaboo of inflationistas is runaway inflation. Essentially that only happens when goverments start (and continue) to pay for stuff with money they have neither collected in taxes nor borrowed.

There are other causes (capital flows, say) but the bottom line is that the bad effects of inflation are that it (a)confounds planning, (b)penalizes savers, (c)rewards debtors - which is not a bad effect if you are a debtor, and (d)makes it hard to borrow, because of (b).

Those who try to say inflation helps the rich and hurts the poor are mostly wrong. Savers are mostly rich. Many debtors are poor. Of course a, b, and d can hurt almost anybody, but their are times (of low aggregate demand) when inflation is an excellent thing for most of the people, because it pumps up spending and jobs.