The economy experiences inflation, this is when there is a sustained increase in the price level of goods and services in an economy over a period of time. The average annual inflation rate is currently 3.22%, the banks usually target an inflation rate of 2%. Inflation impacts on many facets of the economy, both short and long term. The higher levels of inflation tend to result in much severe consequences therefore, it is impact the government is able to attain a low and consistent inflation rate. As inflation rises, every dollar you own buys a smaller percentage of a good or service. Inflation has evidently proved to be both a negative and positive impact on the economy, some positive and negative impacts include; wage growth, certainty, unemployment and increasing interest rates amongst other things.
With there being numerous disadvantages to inflation, deflation has been known to effect the economy quite severely, deflation is when there negative inflation, therefore, a decrease in the general prices of goods and services. Recently, Mayne Pharma (a pharmaceutical company in the U.S) experienced a full-year loss of $133.98 million, compared to a profit of $88.57 million in the previous year. The drastic drop was due to a focus on efficiency after a bad start to year amid heightened price deflation. “The double digit deflation year in, year out has proved to be quite unsustainable for the economy” states Mayne Pharma. Regardless of the Pharma incident, deflation also increases the real value of debt and reduces the disposable income of individuals who are struggling to pay off their debt. This deflation result caused debt burdens to increase since the inflation rate of 2% fails to materialise.
However, the negative impact of inflation is that it reduces the value of savings, which is basically income that is not spent as well as fall in real wages Inflation makes it cost lier to save especially when return on savings and it is a huge problem especially if inflation is higher than interest rates. This is because when your savings will buy a lower quantity of goods, that means goods will be more expensive. In order for your money to be ‘worth’ the same amount, you will need your income to increase by at least the rate of inflation each year. So consumers have to be very careful when inflation goes up. However the impact of inflation depends on the real rate of interest. So if the real rate of interest is low it means the money you save in the bank, the rate of interest you get will be lower than the rate of inflation meaning you are becoming worse off and it is vice versa if the real rate of interest is high. So, if savers find a really good savings accounts which pay an interest rate greater than inflation it will be beneficial. Hence, inflation reduces the value of savings if inflation is higher than interest rates.
Inflation is very well known by its impacts on wages, specially their growth. Wage growth is the purchasing power of the worker’s pay, which brings into play prices of goods and services.
Even though inflation does have deflation as quite a severe consequences, moderating rates of inflation bring down inflation and overall have a positive effect on the economy. Moderate rates of inflation allow prices to adjust and goods to attain their real, worthful price. In recent findings Recently in Washington, consumer price pressures begun to moderate in August 2018 after a continuous build-up of inflation throughout the whole year, this has proved to be a positive signal for workers who were extremely disappointed seeing checks cutting down by huge amounts. Inflation has muted the effect of higher pay. Labor Department data released last week showed workers’ average hourly earnings rose 2.9% in August from a year earlier, the best rate since 2009. When adjusting for inflation, hourly earnings rose just 0.2% from a year earlier. While modest, that’s an improvement from the prior three months when there was no real wage growth. Due to the moderate rates of inflation the Central bankers will meet later in September and are widely expected to increase the benchmark rate. Therefore, moderate rates of inflation are a sign of a healthy economy whereby with economic growth, we occasionally experiences a degree of inflation.