Inflation

In contemporary economies, inflation ( a rise in the general price level of an economy ) is often seen negatively, for it erodes the purchasing power of money and may lead to a knock in confidence for consumers, investors and speculators alike.

To simply regard inflation as an absolute negative for a given economy or economic region, is however, incorrect and ignorant of the positive benefits and intricacies that can be associated with a small amount of inflation. Firstly, there are two ways in which inflation is instigated; There is both cost-push, and demand-pull inflation, which, as their respective names suggest, denote differing causes for rising prices. Cost-push inflation is generally seen as a negative, as the cost of production for a given economy has increased , which could insinuate productive or allocative inefficiency. On the contrary, demand-pull inflation is inflation caused by increases in aggregate demand and by extension GDP/ economic growth, which is crucial to any economy and manifests itself in some inflation due to the basic supply and demand mechanism.

Furthermore, inflation is often targeted by central banks and governments; The Bank of England , for example, aims to keep inflation below a certain rate and manipulates monetary policy to do so. Inflation targeting brings with it the obvious benefits of transparency and accountability, which can infuse the economy with confidence and promote spending. A perfect example of how a small amount of healthy inflation can be beneficial to an economy would be the recent deflationary pressure negatively impacting confidence of investors.