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How can inflation be good for you? Top Stories

By Brian Milligan
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Personal Finance Reporter, BBC News
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So, the governor of the Bank of England, Mark Carney, is filling his fountain
pen, and looking for a stamp.
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Now that inflation has fallen to 0.5% on the Consumer Prices Index (CPI)
measure, he's got to write a letter to the chancellor, explaining why inflation
has missed the Bank's target of 2% by more than one percentage point.

But why on earth should he be writing to George Osborne to apologise, when

low inflation looks so attractive?

For example, falling oil prices will probably mean that the average British
motorist will save around £140 this year. What he or she doesn't spend on
petrol - perhaps £4bn in total - is likely to be spent elsewhere, so boosting the
economy in other ways. Why North America's killer heat
scares me
So if falling prices are good for individuals and the economy, how can inflation
also be beneficial?

How does inflation stimulate the

economy?
In the example of falling oil prices, the motorist probably doesn't have much
choice as to whether to buy petrol or not. But imagine if the price of the car Fighting back against a mice plague
itself were to start falling. Instead of buying yourself a new car this year, why
not buy it next year, when it might be hundreds of pounds cheaper? A little
inflation encourages you to buy sooner - and that boosts economic growth.

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Anyone with a mortgage or a loan benefits from inflation, as it has the effect
of eroding debt. In the 1960s my father bought a house for £11,000. But with
inflation peaking at around 13% in the late 70s, his wages were rising fast too See inside Buckingham Palace's
- meaning the mortgage repayments were taking an ever smaller share of his gardens
income. By contrast, deflation - or falling prices - increases the real value of
debts. Not a good place to be.

What effect does inflation have on

wages?
Rising prices make it easier for companies to put up wages. They also give How the Nile's mega dam will be
employers the flexibility not to increase wages by as much as inflation, but still filled
offer their staff some sort of rise. In a world of zero inflation some companies
might be forced to cut wages.

That would not be good for morale, recruitment or productivity. For most of
the last five years inflation has been running ahead of wage rises, but thanks
to inflation, wages have also been rising, even if the money doesn't go as far.

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getting larger
inflation?
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The government has a huge debt, which is getting bigger thanks to a deficit of
Elsewhere on the BBC
£90bn. It would dearly love to see that eroded by inflation, which in turn would
see its own income rise. As long as there's a good dose of inflation in the
system, tax revenue should go up, even if the economy is stagnant.

But why is too much inflation bad?

When inflation is too high of course, it is not good for the economy or
individuals. Inflation will always reduce the value of money, unless interest Football phrases
rates are higher than inflation. And the higher inflation gets, the less chance
15 sayings from around the world
there is that savers will see any real return on their money. Although in theory
that should be good for the economy, by encouraging people to spend rather
than save.

High inflation - as Gordon Brown used to remind us when he was chancellor - Most Read
is also a cause of boom and bust in the economy. It therefore produces low
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If inflation in the UK exceeds that of other countries, it can also erode
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Most central banks favour an inflation target that is in the region of 2% to Why North America's killer heat
2.5%. The Bank of England's target of 2% under the CPI measure is fairly scares me 10
typical. Some economists argue there should be a higher target in times of
recession, such as 3%. This can promote higher growth, by keeping interest
rates lower for longer. ADVERTISEMENT

But whatever the precise level, most do agree that a little dose of inflation is
absolutely essential.

"The most important thing to remember is that inflation is not an act of God,
that inflation is not a catastrophe of the elements or a disease that comes like
the plague," said the Austrian philosopher and economist Ludwig von Mises.

"Inflation is a policy."

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