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.
Comments
Anonymous
January 13, 2010
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Hari Krishnan
June 23, 2010
first clear about the concept .
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shanaya
October 08, 2010
can any of u give me a clear cut answer.....is inflation good or bad???
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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.
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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.
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Umbertoli
June 19, 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.
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