Pros And Cons Of Inflation

Inflation is defined as a sustained increase in the general level of prices for goods and services (Investopedia.com). As inflation goes up, every dollar ends up buying a smaller percentage of goods and services and a decline in the purchasing power of money. The opposite of inflation would be deflation where the general level of prices keep falling. As could be imagined there are negative effects of inflation including uncertainty in the economy and the possibility for domestic products to have a lessor value. For individuals inflation can make it very difficult to maintain a standard of living if on a set income. At the same time inflation shows that the economy is growing, if inflation is occurring at a high percentage it could also cause issues. The opposite holds true in that if there is little inflation, the economy is most likely getting weaker.
In the United States the inflation rate target has remained below the 2% target in the last four years which is the Fed’s preferred area. In the graphic below we can see the inflation rates since 2006 and how they have changed along with the economy. As we can see right now for 2016 our inflation rate is about 1% which is an …show more content…
Of course based upon the information I read there is not going to be a large jump in rates, which would have the most dramatic affect. Considering the increase is supposed to be relatively small this will not have a large impact. One benefit of inflation for a firm is that it can reduce the value of debt, of course pending the interest rates which affect the real interest rate. The other obvious benefit of inflation for a firm is that with an increase, typically it is indicative of a growing economy which of course a firm desires. Of course predicting the future is not completely possible, but it appears that there will be positive growth in 2016 which will be beneficial for