Is Inflation Good or Bad for You?

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.

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.

 

 

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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Comments

  • Proudmigrantworker

    November 06, 2007

    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.

  • Arnold

    May 21, 2008

    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.

  • Nick

    June 01, 2008

    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.

  • wala

    June 29, 2008

    ..is it good or bad?

  • Bob

    October 29, 2008

    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.

  • Tom

    December 02, 2008

    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.

  • Anonymous

    March 12, 2009

    Wow, I am shocked at how wrong everyone is. Inflation is good for people and bad for banks. Inflation forces higher interest rates, which is good for savings. You are only right in that inflation also reduces long term debt relative to your pay. That is why the central banks always fight inflation, because it erodes bank wealth while lifting debtors out of poverty. Deflation work the other way. Good for banks bad for people. Look at the now, we are deflating and the banks could care less because you now have to pay them back with fewer of your dollars. When you have more, the banks loose, when you have less the banks win. Thus the steady state we have seen for awhile.

  • AndrewLinus

    September 25, 2009

    Interesting, but I'm not so sure that any of us are getting regular increases in their salary...

  • Jon

    November 09, 2009

    I agree with the comments that suggest wages need to generally keep up with inflation for this to work out. and inflation cannot insure that by itself. All things being equal, increasing the amount of money in circulation would increase the price of everything, including your wages, by the same amount. Supply and demand forces elsewhere can change and make it sometimes not so.

    I disagree with the author's take on assets. Assets like stocks and real estate should increase in price also, all other things being equal, right along with wages. However, if your "assets" are in cash, such as money in the bank, CDs, and bonds. You are basically getting screwed. Inflation is very good for debtors and very bad for creditors. So I feel inflation is good right now, it helps people afford their homes and benefits the credit quality of what lenders have lent out, at the expense of the lender's future profits.

  • Rajiv Gothra

    November 12, 2009

    Inflation, especially when coupled with artificially low interest rates like we have now, takes its heaviest toll or retirees and others who cannot access the labor force. Think Russia or Argentina. Sad.

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