One of the most pernicious effects of inflation is that people waste time trying to stay ahead of inflation. All sorts of useless stratagems develop. Goods are hoarded, and some even spoil, instead of being used for their intended purposes. In extreme hyperinflation, people waste time trying to rid themselves of money, and even in milder levels (like 20% per year) people will do things like buying a car and then putting it up on blocks rather than driving it. And people will borrow money, not because they really need it or can invest it usefully, but to buy things that they can then hoard.
But at least at milder levels (i.e. 10% per year or less) this kind of activity bears some resemblance to profitable investment of time and money. A depression with high unemployment is even worse, because a lot of people do nothing at all.
Therefore, ever since the 1930s, government monetary and fiscal policy has been skewed towards inflation.
There's little point in arguing whether inflation or deflation will occur. Inflation has never ceased and there are many examples of how it is increasing. My own habit is to divide the cost of something by five and if that figure seems reasonable, then it's OK with me. The first dental crown I ever had cost $300. Now I expect to pay $900 or more. If I divide that by 5 I get maybe $180 , so it seems reasonable.
Bran muffins at our local farmers' market went up this year from $1 to $1.25. At another table, the scones are $2.25, still, but the size has been cut by a third.
Gasoline at $2.20 is a temporary bargain. I expect to see it at $8.00 a gallon in a few years, and then all services depending on energy will have to raise prices as well as becoming more efficient.
In Paul Samuelson's classic textbook "Economics," he writes:
"By inflation we mean a time of generally rising prices for goods and factors of production--rising prices for bread, cars, haircuts; rising wages, rents, etc. By deflation we mean a time when most prices are falling."
Anyone can rewrite the definition however he pleases, but the further one departs from this generally accepted use of the word "inflation," the closer one comes to lunatic idiosyncrasy. |
