Intricacies Associated with Inflation
“Some economists are in the habit of terming inflation as a natural consequence of growth in the economy. This notion is only partially true. ”
Inflation often leads to confusion among people in general. The prices rise but it is not comprehensible as to why the prices are rising. Some attribute the price rise to an actual increase in demand, others cite inflation as the main reason and still others blame it on the speculation in the market.Nobody seems to be making the correct economic decisions. Some people become vary of investments. Some tend to invest more than that is required and some take resort to preventive buying, though it is often not excessive.
Some economists are in the habit of terming inflation as a natural consequence of growth in the economy. This notion is only partially true.
To be very precise, inflation is the difference between the proposed and the actual GDP of any country.
If the gap between the proposed and the actual GDP is negative, inflation tends not to raise its head. On the other hand if this gap broadens, we witness an economy that is running well below its potential. It does not mean that growth is not taking place at all. Rather in such a case, growth is accompanied by deflation.
If you ask 3 economists as to what should be the rate of ideal inflation, you are very likely to get three different answers. Such is the variance in their answers that you might land up at deflation while discussing such anomalies.
In fact, we are so much afraid of inflation and give so much attention to it that we tend to forget the dangers of deflation. We even fail to see that the efforts that we are pouring in to control inflation may lead to deflation and eventually recession may set in.
A very simple instance that easily comes to my mind is the case when governments are able to control inflation through drastic measures. The result is that deflation automatically starts penetrating its roots in the economy (in most of the cases).
People who have extra faith in the policies of the government want the prices to fall even more. The result is that the consumption rate of the entire country is delayed by a considerable amount of time.
Many a time, this delay is sufficient for the occurrence of an undersized or even a serious recession.
Author - DeeKay
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