Why Inflation is Good News for the Economy.

T: In fact, with inflation rising, the US economy can expect steady job gains in the short-term future, and effectively transition to higher interest rates in the economy.

On Sunday, the WSJ reported that inflation, as gauged by the CPI, has risen for the second consecutive month with a .2% growth rate. While most people would lament inflation since they lose purchasing power, this is actually a very promising sign for the economy. In fact, with inflation rising, the US economy can expect steady job gains in the short-term future, and effectively transition to higher interest rates in the economy.

With inflation rising, we can expect job-gains in the short-term future because rising inflation is a sign that active money in the economy is increasing. With gas prices stabilizing, it seems that inflation has started to make gains in the economy. Generally, inflation should occur when more money is put into the economy by adjusting interest rates and quantitative easing. When inflation is too low, this can be a sign that the amount of cash being used in the economy is much lower than it should be. Similarly, a deflation can be the result of a recession since money stays stagnant during a recession. In this scenario, people may be investing the money abroad, or saving their money in banks. Right now, with inflation rising from a very low level, this is a sign that business activity has increased in the economy. When money spreads around the economy, people are more likely to spend that money because income has risen and seems more stable. Consequently, consumption causes stores to invest more money and hire more workers to accommodate this increase in demand. Thus, inflation rising allows us to believe that spending will rise, which will cause jobs to increase.

While job gains in the economy are certainly a great thing for the FED, the FED might be more excited with rising inflation because it will allow the FED to raise interest rates with fewer complications. Recently, the head of Mexico’s Central Bank has stated that he is worried about how fragile the economic recovery is around the world with regards to low interest rates. Certainly, he has reason to be worried since governments around the world have massively cut interest rates since the recession, and further stimulated their economies with quantitative easing. This response has been unprecedented. It will be interesting to see how the FED deals with that; however, rising inflation will allow the FED to avoid this dilemma. The rise in inflation will offset the effect of higher interest rates. Therefore, inflation is definitely an exciting economic development for the FED.

While most Americans will dread this rise in inflation, there is significant evidence to suggest that this will positively affect the economy. In general, with inflation rising, the US can expect substantial job gains in the short-term future and less effects from the rise in interest rates at the end of the year.

3 thoughts on “Why Inflation is Good News for the Economy.

  1. Chang Tian

    What about people’s expectation on the coming inflation? I think if people can correctly foresee the inflation in the short term future, then there will be no increase in labor demand.

  2. Hojoon Kim

    I believe the only good thing about inflation is increase in job gains. However, it is important to point out that purchasing power decreases when there is inflation.

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