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Who’s Afraid of the Big Bad Wolf: Demystifying Inflation Part 3

Who’s Afraid of the Big Bad Wolf: Demystifying Inflation Part 3

| July 21, 2021
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Inflation: Why It's Good

Ah, now off to the good part. Last week we talked about all the reasons inflation is the bad guy, but it turns out that inflation does have some redeeming qualities.


Again, inflation is like kids - doing things that annoy you and cost you money. But, they will also do things that bring you joy. So, focusing on those joyful moments will help inflation, and your kids seem a little less like something you want to get rid of. Not to mention, you’re stuck with them both forever, so it’s time to look on the bright side. 


We also have kids on purpose (hopefully), and we tend to initiate inflation on purpose, as well. I know what comes to your mind when you think of both of those things, “Why did we want to do that?”


Well, if the country is going through a period where it is running below capacity, inflating prices can help jump-start spending, production, and employment. The same way we have kids because we think it will breathe new life into our later years. Except inflating actually does that.


Everything is Good in Moderation

The only time inflation is bad is when it is really high. When we have moderate inflation, we start to see some positive side effects. In some cases, we might need a little inflation to keep the economy kicking. For example, last week, we talked about how high inflation can stunt economic growth because it creates a lack of stability in the prices of goods/services. As a result, nobody feels like taking any unnecessary risks in their ventures or investments.


But if inflation never existed, and we constantly assumed that prices would gradually fall, we would almost never spend. So instead, we’d wait around for years knowing that, down the line, there may be a better deal. It’s the same reason we all have high standards in our twenties  -  we assume someone better is sure to come along. But then we hit thirty and realize we’re lucky just to find a guy with a dad bod and clean laundry. So we should scoop him up. (This is definitely not just my way of making guys with dad bods look better. This is purely financial advice…)


Anyway, we need a minor threat of inflation to make us want to spend our money before it depreciates more. And if inflation is at a relatively low level, it can encourage us to do that.


Increased Spending

Inflation always means that there’s a little more money in the economy - that is why the demand for money goes down, forcing its value to go down with it. That’s not always a bad thing, though. If there’s more money in the economy, there’s more money to spend. And if inflation is moderate, we aren’t as scared to spend it. 


Actually, we want to spend it. Since inflation decreases its value, we start itching to get rid of money in as many ways as possible so that it doesn’t sit around being worthless. Again, think of your kids. They rise in age, naturally. And before you know it, they’re twenty years old, they’re sitting on your couch, and they’re eating your hard-earned hot Cheetos and growing more and more worthless by the day. The solution? Kick ‘em out!


Increased Production

We want the cash out of our pockets and into things that won’t lose as much value. So we stock up on groceries, clothes, and gas. In addition, companies might start making some important capital investments sooner rather than later since they’re worried their purchasing power might decrease even more if they put it off. This creates new demand for products, and suddenly the economy is jolted into producing once again.


New Jobs

Since we have a greater need for production, we start to have a greater demand for workers to produce it. This helps combat unemployment, and soon the country is on track to a period of good economic growth and rising employment levels. Full disclosure, that does not mean that if you kick your real kids out, they will also go out and get jobs. Wishful thinking, though. 


Repaying Debts

Imagine you ask your friend for a $10 bill so you can buy some snacks at the vending machine. Since your friends are cheapskates, they start bothering you about the ten dollars you borrowed a while back, even though you offered them some of your M&M’s. Trust no one.


When the time comes to repay them, inflation might have your back. They need $10, but that $10 is worth a lot less now, so it feels like you’re paying back more like $5. You just got half off your M&M’s, Twix Bars, and bag of chips (while you’re there can you grab me a KitKat, I heard dad bods are in now). 


That’s a little bit how lending works when inflation is at a sustainable level. Paying back debts and loans becomes a little easier because the amount you owe is worth less than before. So, don’t hate inflation too much; it might save you some money at the same time that it steals it. Like when your kid buys you a present with the money, you gave them. It’s the thought that counts.


Bottom Line

So, inflation has its ups and downs. Typically, we start to see the upside of inflation when inflation itself is not too high. If it remains at a fairly moderate level, inflation can be a good thing for the economy, which is why we sometimes do it on purpose. That’s right, sometimes the government isn’t just screwing with the economy for fun - sometimes it has a reason! Who would’ve thought?  


Speaking of thinking, you might still be thinking about the ways inflation can go wrong. That’s understandable. The rollercoaster ride of inflating prices is exhausting, and there’s only so many times you can enjoy the climb until you feel the drop once again, and you’re vomiting up M&M’s and Twix Bars all over the kid in the seat in front of you. Try not to aim directly at him. I know we compared inflation to children, but it’s not actually Timmy’s fault. 


Wipe the chocolate off of your face and take a deep breath. Inflation is not something to be afraid of, which is exactly what we will discuss next week. Since you will be riding the rollercoaster of inflation again, hopefully my words of wisdom will help keep you from screaming each time you get on. Until next time, enjoy the ride. 


Sources: https://www.investopedia.com/articles/insights/122016/9-common-effects-inflation.asp


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