I was having an arguement with this person saying that people have a misconception about inflationbecause they think that inflation will rob him of his purchasing power of his hard earned money. So thatwhen the prices rises, your dollar will buy fewer goods so it might seem that it lowers living standards. But i said thatthat is not the case, its just a misconception. Most people earn their money through selling their services so inflation in income goes handto hand with inflation in prices...
For example:Lets say a worker recieves a yearly raise of 10 percent. This worker will view his raise as a reward for his hard work but when inflation rate increases by 6 percent it reduces the value of the workers raise to 4 percent. Now the worker will feel that he has been cheated on his income. But if the central bank was to lower the inflation rate from the 6 percent to 0 percent, the workers annual raise would fall from the 10 percent to 4 percent. As you can see, the workers real income would not rise more quickly...People believe the inflation miconception because they do not appreciate the principle of monetary neutrality.So that was my response, his response was:
I would rather have 1% inflation and 3% pay rise than 10% inflation and 12% pay rise. High and fluctuating inflation makes businesses wary of investing because it makes the prospective returns harder to calculate in real terms, this uncertainty causes them to be cautious and cut back on investments which might have otherwise been made. As investment is what drives long term productivity and growth, this is not good.Inflation is also bad for people on fixed incomes. While workers might just be able to claim a higher pay rise, pensioners don't have the same power to demand higher pensions.
What do I say back?
Unikkatel: inflation will rob him of his purchasing power of his hard earned money.
Well, inflation is a loss in the purchasing power of a currency. Rising prices are an effect of inflation.
Unikkatel:Most people earn their money through selling their services so inflation in income goes handto hand with inflation in prices...
I don't have any statistics to back this up, but I'd say it's a pretty sure thing than a vast majority of people don't get yearly salary increases at the same pace as inflation.
Most importantly though, the inflation via credit expansion that we are experiencing affects different people at different times. The people to get the new money first benefit while the people that get it later suffer for it. It's pretty much a general consensus around here that inflation is a bad thing, as it represents forced wealth redistribution via a hidden 'tax'.
Unikkatel:For example:Lets say a worker recieves a yearly raise of 10 percent. This worker will view his raise as a reward for his hard work but when inflation rate increases by 6 percent it reduces the value of the workers raise to 4 percent. Now the worker will feel that he has been cheated on his income. But if the central bank was to lower the inflation rate from the 6 percent to 0 percent, the workers annual raise would fall from the 10 percent to 4 percent. As you can see, the workers real income would not rise more quickly...
But wages tend not to keep pace with inflation - they increase more slowly. Not only that, but his taxes will go up this way. Finally, does your worker have any savings?
yeah, wages lag inflation. I haven't gotten a raise yet to keep up with food and energy price increases caused by the fed's credit expansion. My standard of living has decreased.
asset ownership keeps you ahead though. Inflation wipes out the middle class more than any other institution.
Inflation is a bad thing, for the simple reason that wage increases tend to lag price increases and that inflation eats away at the value of money stores and savings.
I would prefer a situation of either static prices overall or a very slow deflation.
Ofcourse, there are several costs to a rising inflation, I am not arguing otherwise. Persistent growth in the money supply will definatly have some effect on the REAL variables. These costs can be the resources wasted when the inflation encourages people to reduce their money holdings, thus lowering investment and in the long run output. Inflation also distorts relative prices, meaning that inflation causes relative prices to vary more than they otherwise would. Consumer decisions would then also be distorted, so the markets are less able to allocate the resources to their best use.
All I was saying was that the inflation fallacy of a fall in purchasing power is wrong, or at least partly wrong.
Unikkatel:All I was saying was that the inflation fallacy of a fall in purchasing power is wrong, or at least partly wrong.
I am failing to see your logic. Wages may rise for some due to productive increases/recognition, but for the average worker, wages don't outpace inflation. If they did, businesses would go bankrupt.
the short answer is you want neither inflation nor deflation (at any percentage rate) you want price stability.
I explained my thoughts in another thread:
http://mises.org/Community/forums/t/2313.aspx
don
I like it when things get cheaper, personally.
"He that struggles with us strengthens our nerves, and sharpens our skill. Our antagonist is our helper." Edmund Burke
Unikkatel: I was having an arguement with this person saying that people have a misconception about inflationbecause they think that inflation will rob him of his purchasing power of his hard earned money. So thatwhen the prices rises, your dollar will buy fewer goods so it might seem that it lowers living standards. But i said thatthat is not the case, its just a misconception. Most people earn their money through selling their services so inflation in income goes handto hand with inflation in prices...
Even if it is true that wages increase with prices, inflation still undermines one's incentive to save (what's the point of putting money in the bank if it's just going to depreciate?), which in turn causes malinvestment.
The ravings of a few lunatic Keynesians notwithstanding, the importance of saving and sound investment cannot be overstated; they are the prerequisite to and foundation of all economic growth.
Diminishing Marginal Utility - IT'S THE LAW!
Monetary inflation would be distributionally irrelevant if it were neutral. If all prices and all incomes increased by 10% per year, there would be no real effect of monetary ifnlation.
However, it is not true that monetary inflatiion is neutral. Otherwise, there wouldn't be counterfeiters: their very existence proves that money has effects on relative incomes.
The counterfeiter spends its fake money before prices go up, and drains resources out of the Cantillon effect. Seignorage taken by governments by means of monetary inflation obeys the same rule. The principle is that if you have 10 and I have 10, we each buy 50% of production; if I have 11 (one counterfeited), I buy 55%...