Monday, August 18, 2008

10 overlooked reasons to love inflation

Inflation gets its share of flak, and for good reason. It is a wealth destroyer, and it lessens people’s purchasing power. But there can also be a good side to inflation. Following are my 10 overlooked reasons why inflation can be good. I will be brief on each point to let the reader add his own thoughts.

1. It is a good indicator that many people in the world are coming out of poverty, which is always good.
2. It encourages conservation, as people try to get more use out of existing items.
3. It promotes demand destruction in relatively more frivolous items.
4. It evens out the playing field for companies around the world – countries in developing countries will now have similar cost structures as those in developed countries, giving developed country businesses a respite from attacks by lower-cost competitors.
5. Businesses in developing countries are also given a respite as companies from developed countries are sometimes forced to retreat back to their home markets in efforts to cut costs.
6. It lessens global carbon footprint and encourages investment in alternative sources of energy.
7. It forces more innovative thinking as the primary source of new wealth creation, in place of simply relying on asset appreciation, whose value is usually destroyed by inflation.
8. It is now less likely for financial bubbles to crop up.
9. It might eventually be a war-deterrent because inflation makes waging wars costlier.
10. It might eventually solve the developed world’s growing obesity problem.

Ok, ok. The bad effects of inflation still outweigh the points above, and all except point one can happen in a low inflation environment. But since this could be the only positive reading on the economy you’re going to get all day, try to be more appreciative.

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