Wednesday, February 11, 2009

Inflation is important

Your mom would usually complain of prices soaring through the roof each year. She'll surely not complain about the fact that each year there has been more income in her hands.

Inflation is unfortunately a necessary evil. We hate the fact that prices soar but ignore the increase in incomes that go along with it. It's obvious, as closer to the equilibrium point, increase in prices means more incomes in the hands of factors that enter production.

In short: Prices need to rise. It's only when prices rise, is there an incentive to sell. When there is an incentive to sell will suppliers of goods and services deploy more capital and resources. This increases the factor incomes at the resources end which then creates demand for other services. And like a magic wand that increased prices eventually lead to your increased income.

So if prices drop you may be happy but good chance that you income would never increase.

So mama, just relax, you need inflation and it's important.

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