Even though it is the ruin of every country’s mismanaged economy, but did you know that the right amount of inflation is vital for a thriving economic system?
By: Ringo Bones
It is one of those things that either too much or too little is a bad thing and even though there had been news in the past that it was already cited as the ruin of some country’s mismanaged economy, the right amount of inflation is vital for the sustainable management of a thriving economy. But if it is important, how much inflation is necessary to make an economic system truly sustainable?
At present due to weak energy prices since the latter half of 2014, global inflation levels are currently at unsustainably low levels. An annual inflation rate within 3-percent, give or take a few percentage points, is necessary for economically viable conditions. While too much inflation – the rapid increase of price of goods in too short a time - is usually a sign of an mismanaged economy or a result of some economic sanctions that will eventually lead to economic collapse, too little of it will foster inflation’s “evil twin” called deflation – where prices of goods decline over time. Deflation can be disastrous for a thriving economy because consumers will keep on postponing their purchase until prices fall further which could stifle economic activity to a virtual standstill.
Keeping inflation rates at just the right levels was the raison d’être for the decision of the U.S. Federal Reserve to increase the overall interest rates before the end of 2015 but the Fed indefinitely postponed further interest rate increases for fear that it may stifle the ongoing economic recovery of the United States. But most economic experts say that if the Fed keeps on postponing their other scheduled interest rate hikes, the U.S. economy could experience deflation problems by 2017.