Is inflation an economic challenge?

Many economists oppose the belief that inflation is a primary economic challenge. According to the statistics, the global inflation rate is volatile and ranges between 2,7% and 4,35% (for the years 2016-2026). This implies that inflation does impact the global economy less or more drastically over time.

Imagine the following hypothetical situation: in country X, inflation affected the prices of the goods. The wages of its citizens increased simultaneously. In that setting, nothing changed in the lifestyle of the people. They still were able to afford to buy the same goods, went to the same stores as before. Inflation did not cause any problems both for the country and its citizens. However, the reality does not always follow the plot of this story. For instance, Russia experienced steep rises in price inflation in 2021 (see the statistics below), while the wages of its citizens remained mostly the same. When the prices exceed the wages, a number of problems might occur.

1. Unintended redistributions of purchasing power

Inflation can impact those who are holding a lot of cash (since the buying value of money is diminished) and those who have financial assets invested in a way that the nominal return does not keep up with inflation. For instance, if a person has savings in a bank account that pays a 5% interest rate, and the inflation rate increases by 7%, then the real rate of return for the money he/she will receive will be negative 2%.

However, some experienced individuals have learned to take advantage of the skyrocketing interest rates during inflation. Assume that you borrow some money at a fixed rate of 10%. If inflation rises to 6%, then you would have to return only a 4% interest rate. However, if inflation goes as high as 10%, then the real interest rate will be 0%. In this case, the borrower’s benefits turn into the lender’s loss.

The wage earners can also be affected by inflation. Wage adjustments happen only once or twice a year, which makes them a very infrequent process. A year or two years delay can create various difficulties and be a source of conflicts between employers and employees.

This unjust environment created by inflation, when one loses and the other wins, may create dangerous tension in society.

2. Blurred Price signals

Inflation makes prices volatile. That makes it harder for both consumers and sellers to establish the actual prices of goods. This, in return, creates inevitable blunders because it is hard to predict what the prices are going to be during inflation; hence, the uncertainty hangs in the air, which produces the third economic problem caused by inflation, a problem of long-term planning.

3. A problem of long-term planning

One example of this problem occurring might be the planning for retirement. One cannot know with absolute certainty what value the money he possesses now will have in the future. This poses a problem for people to rely on the money they save, which can also cause anxiety and stress.

Conclusion

Inflation has both positive and negative sides to it. However, one way or another, it creates an atmosphere of overwhelming uncertainty, which can result in social tension and anxiety.