What About the Benefits of Inflation?

All the media attention to Inflation is given Inflation a bad reputation. Yes, Inflation can be bad, but it isn’t bad by default. It’s a lot like Intelligence. Depending upon how high or low your Intelligence rating is there are favorable and unfavorable aspects of what implications that ‘score’ has for numerous situations and areas of your life. [Note: In comparing Inflation to Intelligence measures, it is critical to know that they have an inverted evaluative relationship. A high Intelligence score is viewed favorably while a low Inflation score is favored; and vice versa. There are other attributes between the two concepts which are not as easily aligned, such as there is no ‘negative’ Intelligence score except perhaps for politicians, but you can have negative Inflation: aka Deflation.]

So, how can increasing costs ever be a good thing? Is the media involved in some duplicitous effort to prevent the public being duly “informed” about the issues related to Inflation? Is the Financial industry and companies avoiding these aspects of Inflation because they have their own financial interests in the public’s perception that when you hear “Inflation” it only means bad things? What about the nation’s economists, have they somehow been drawn into a conspiracy of silence?

No, it’s just that the benefits of Inflation are often longer-term effects and some of the benefits occur and no one mentions or associates the fact that Inflation played a role in delivering the benefits. Another factor is that the negative side can often occur rapidly and have an immediate impact upon individuals’ lives and financial circumstances. There is a behavioral economic phenomena: Loss Aversion, which illustrates a disconnect between actual human behavior and the ‘rational’ consumer of classic economic theory where the value of a loss is greater than the value of the cost of the item that would be lost. The logic of cause and effect and the perception of value are not reliable facets of real-world economic operations. The benefits of Inflation suffer from both the missed or diminished attribution of “cause and effect” and the proper perception of the value that can be derived from it. To contort a well-known quote: “This Inflation is not the one you are looking for.”

In looking at Inflation, we see a rise in price. We don’t always know why the price increased but there is always at least one reason sometimes several. But let’s step back and look at the big picture. Somewhere in the process(es) that make the product/service that you are buying there is something that is causing the cost / price relationship to change. The thing that changes may be the cost of the material it is made from. It may be the cost of the workers who produce the material, fabricate the goods/parts that it is made of, or assemble it into its final for sale product. It may be the cost of fuel to run machinery or transport the goods, even the capacity of shipping ports or trucks, or to keep them at the right temperature. Let’s call theses causes: Type A – Supply Issues.

At this point, you know that there is another Type coming. Prices can also go up because you can make more profit if you charge more. In basic economic theory this a consequence of the supply-demand model. When demand increases and supply doesn’t increase to meet it, suppliers raise their prices because consumers will pay. This ‘scarcity’ effect can be due to there literally being no more of the supply available or that the ability to product more supply is limited by some part of the process which creates the product. You can’t grow more of the annual apple crop this year no matter how much demand there is for them. It doesn’t matter what caused the apple crop to be limited or the demand to be what it is. There is only what there is. Each apple becomes more valuable as long as consumers will keep paying more. Type B – Scarcity.

If the conditions are right, the supplier can raise the price just because they believe they can make more profit at the higher price. This only works if there is insufficient competition that the consumers are aware of.  Type C – Lack of Competition.

These different types of supply conditions create the necessity or opportunity for Inflation. And they also create the opportunity for how Inflation can produce benefits. With increased prices there are openings for someone to seize an opportunity to address one of the ‘causal’ conditions which creates a counter-response to the side of Inflation that we don’t like. Investments can be worth making in infrastructure or in production facilities, new fuel options can become cheaper than older ones, farmers can choose to plant more apple trees or to increase yields via new varieties, and entrepreneurs may enter the market and produce the equivalent or better products at lower prices. And the opportunity that Inflation creates may focus investment in research and innovations that alter the market for the product from marginally to completely out-competing it and replacing it in the marketplace.

Most of these benefits of course are less rapid than the conditions that sparked them; but there is no doubt that Inflation can be and is a significant factor in prompting efforts to counter its negative impacts. Yes, too much Inflation is bad mostly because the systems that have to respond to it are not able to adapt fast enough to avoid disruptions and problems for consumers but how much progress would have never occurred or been substantially delayed because it was too low?

These benefits are, I am sure, of little comfort to consumers today because they only feel the discomfort and frustrations. Perhaps we should consider how much our Consumer-driven economy mimics the answer to that awkward sentiment: “If you want to know what the problem is, take a look in a mirror.”