It may seem counter-intuitive but inflation or an increase
in prices, or a decrease in the value of the currency, is
something that is beneficial for the economy. Though one could not argue in favor of the
kind of inflation in Zimbabwe, a moderate inflation of 3-4% is what the aim of economic
policy should be.
There are several reasons why the
moderate level of inflation is required. One is them is that deflation means an
increase in the value of money. So people are less likely
to spend now; they keep the money with themselves as it would be possible to buy more
with the same money in the future. This decreases the present demand for
goods and in turn leads to further deflation. A low
demand implies that supply too has to be
reduced.
The second is deflation discourages people from
borrowing money. This follows from the fact that the
repayment for the funds that they borrow now would later be with money that has a higher
value than what they have borrowed.
A third is a
deflationary scenario increases unemployment as there is
not enough demand to warrant an increase in supply; owners of business are averse to
borrowing funds to increase capacity and employment opportunities; and the logically
sound decrease in wages which is expected to happen does not due to what is known as
nominal wage rigidity.
These are some of the
reasons why inflation should be allowed to remain at a moderate level for healthy
economic growth.
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