The conventional wisdom says that inflation is very bad. It makes everything we buy more expensive and decreases the value of our currency. But there are times when inflation is good for you.
Submitted: Oct 9, 2007
Views: 6410
Comments: 7
Likes: 14
There's been a bit of talk about inflation lately and how it might be rearing its ugly head. The conventional wisdom says that inflation is very bad. It makes everything we buy more expensive and decreases the value of our currency. But there are times when inflation is good for you.
For example, if you purchase a home with a fixed rate mortgage, inflation will decrease the size of your payments in relative terms. Say you are paying $1,000 per month towards your mortgage. Now let's say that inflation increases at 5% per year. That means your mortgage payment shinks by 5% per year as your salary adjusts to inflation. That's why when you ask someone how much their payments were 40 years ago it seems like peanuts. Without inflation, that $1,000 per month would seem like $1,000 per month.
A little inflation might actually help sub-prime borrowers by making the payments a bit more manageable.
Generally, if you have a lot of debt, inflation works for you by decreasing the relative size of that debt. If you have a lot of assets, inflation works in the opposite by decreasing the value of those assets. $1,000,000 50 years ago is not the same as $1,000,000 today because of inflation.
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Comments Received:
Proudmigrantworker
(Unregistered)
hmm, I have to disagree with your comment. your idea only holds true if wages and salaries keep up with inflation by a significant margin. so if inflation is 5% per year that means wages have to increase at least by that much to balance the equation. For the last 2 decades wages have just bearly match the inflation rate. Many daily things are getting more expensive now then ever before while wages are falling behind. A combo from Carles Jr. cost $7-$8 now, while just 5 years ago it was around $5.
Posted: Nov 6, 2007
Arnold
(Unregistered)
Wages need to match inflation. 3% raises aren't going to cut it anymore. Inflation has been in the 2-3% range over the last 10 years so companies haven't been forced to increase. But now the news is out that inflation is back and they will have to. If not, watch out for some very disgruntled workers.
Posted: May 20, 2008
Nick
(Unregistered)
You can't simply force companies to raise wages to match inflation. If you do then the inflation rate would then go up even higher. Once that cycle begins your inflation rate could spiral out of control. After world war 1, Germany experiened a 10% inflation rate every hour! This caused the government to print higher and higher denominations on there bills until the whole economic system just collapsed under its own weight.
Posted: Jun 1, 2008
wala
(Unregistered)
..is it good or bad?
Posted: Jun 29, 2008
Bob
(Unregistered)
Inflation affected several markets, depreciating many commodities, thus good for debtors and other owners. However, the consumer and creditors are affected adversely. Inflation will affect us further.
Posted: Oct 28, 2008
Tom
(Unregistered)
Not an issue right now. We could only wish for some inflation.
In general, if salaries are increasing because of inflation good for debors, as Bob points out. Your salary increased but debts stay the same. In deflationary environment we are in today, better to have cash in the bank, or even gold. Those assets gain value as the price of commodities decrease.
Posted: Dec 1, 2008
Interesting, but I'm not so sure that any of us are getting regular increases in their salary...
Posted: Sep 25, 2009
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