Inflation If

Inflation If

Inflation If an inflationary situation continues long enough, people will learn to anticipate the continuous increase in prices and plan accordingly. If people expect the value of money to fall they will have little desire to hold cash or invested savings, and the demand for goods will increase. If prices are expected to rise, people will buy goods earlier rather than later. They will even buy with borrowed money, since the real cost of loans is reduced (and may even be negative) because the value of money which repays the loan is less than the value of the money that was borrowed, and the price of the goods bought with the loan is higher at the time of repayment. Further, when the value of money is expected to continue to fall, business men are likely to base their prices on expected replacement costs rather than current costs, and wage claims are likely to be based on expected rises in the cost of living. A modest inflation thus tends to become more rapid and, unless drastic measures are taken, may become uncontrollable.

There is some evidence that a prolonged high level of economic activity can be maintained without inflation; Britain has seemed to achieve both in recent years. But economists differ. The sufferers from inflation are people with incomes fixed in money terms, such as pensioners, with incomes derived from state benefits or annuities and fixed interest-bearing securities, and salary-earners whose earnings are not closely tied to general prices. So long as the inflation is moderate, and something is done to offset the disadvantages for those with fixed income, some economists believe that inflation is a small and even inevitable price to pay for maintaining high employment and income. The question is whether the inflation can remain moderate.

A further complication may arise from the monetary situation in other countries with which trade is conducted. If their prices are generally stable, even modest inflation at home may create difficulties in paying for imports. H their prices are generally rising there will be other difficulties (the exchange rates and others) in keeping general prices rigidly stable.

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