Pros and cons of more inflation

Date posted: November 12, 2010

There’s a report that the Federal Reserve wants to create more inflation in the economy. But why? Isn’t inflation bad for everyone? N.C. State University economist Mike Walden answers.

“Like most things in economics, there are plusses and minuses to just about every economic variable, and I think inflation is no different. Inflation does certainly hurt a lot of people, but it also helps others.

“On the hurt side, inflation does drive up the cost of living for everyone. So that means that people need more income in order to keep up with rising prices. But particularly for those folks with debt, inflation actually helps people who are indebted in a big way because it makes the value of the dollar less. And so it really reduces both the value of the debt and the value of those debt payments.

“Also if you are an exporter, if you are a company that is selling products to overseas buyers, inflation helps because it tends to lower the value of the dollar on international markets, thereby making U.S. exports cheaper in foreign countries, and so you as an exporter can sell more.

“And I think what the Federal Reserve is saying right now is, number one, they want to help out debtors. That is a big problem in the country; they want to help out debtors, and inflation will help those debtors. And secondly I think they see that exports could be a big generator of economic growth in the country, so they want to motivate exports.”

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