Is Inflation Good or Bad for You?

Author: , on October 10, 2007

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.




  • Umbertoli

    June 18, 2011

    The US is awash in debt. The only thing that will make a dent in it is inflation. But it needs to be wage inflation. If prices go up and wages don't then that just makes it worse. But you can't get wage inflation unless the economy begins to take off. Right now, the economy is dead in the water because of debt. Massive catch-22.

  • Tvallent

    June 06, 2011

    If wages keep up with inflation then it is true, debts will shrink. This generally happened in the past. If wages do not keep up, then you become poorer. Some inflation is probably good. Inflation above 4-5% is most likely bad.

  • muhammad yousaf

    January 01, 2011

    brother inflation means the souring prices of the daily use commodities....
    it depends upon the policies of goverment and that policies are termed as taxes.

  • shanaya

    October 08, 2010

    can any of u give me a clear cut inflation good or bad???

  • Hari Krishnan

    June 23, 2010

    first clear about the concept .

  • Anonymous

    January 13, 2010

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  • 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.

  • 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.

  • AndrewLinus

    September 25, 2009

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

  • Anonymous

    March 11, 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.

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