INFLATION CAN OUR ECONOMY GROW WITHOUT IT?
INFLATION CAN OUR ECONOMY GROW WITHOUT IT? What is inflation? The definition of inflation, according to Webster’s Revised Unabridged Dictionary, is “an undue expansion or increase, from overissue.” Although, Webster’s is considered by most to be the overall best dictionary, WordNet states the meaning of inflation a lot clearer by saying, “it’s a general and progressive increase in prices.” It occurs when the value of goods rises faster than the value of money. The usual approximate measure of this is the Consumer Price Index, which weigh the prices of different goods according to importance in a typical budget and then shows how much the prices of these goods have increased. This immediately raises some problems; for example, the weight of the goods must change over time. The importance of computers was not measured in the price index 100 years ago. Another problem is the failure of the price index to capture changes in quality. The quality of a good may have improved by 20%, while the price has only risen by 10%. The consumer price index doesn’t feel this should be a factor, but many would disagree. Hence, inflation is not easy to define in practice. This should be kept in mind when discussing how to defeat inflation. There have been numerous theories on how to defeat inflation and even some theories on whether, or not, it should be defeated at all. Some say that inflation is not only expected, but often, needed. Economists believe that in order for the economy to expand and grow, there has to be some level of inflation.
Therefore, the opposite holds true as well. If you want to lower inflation, you have to accept a semi-standard economy. They call this tradeoff the Phillips Curve. The Phillips Curve is thought to be the “proper” way of balancing economic growth and inflation. For this reason the Federal Reserve is always looking for the perfect equilibrium at which we can maximize our economic growth while keeping inflation as minimal as possible. They do this by increasing and decreasing interest rates. Although, Economists and the Federal Reserve abide by the Phillips Curve as a general rule for not letting inflation get out of hand, it has been proven many times in the past that it is possible to have a very healthy and prosperous economy without raising inflation at all. There are even examples of inflation declining while the economy booms. As Steve Forbes, of Forbes magazine, said, “Prosperity is not the fueler of inflation.” For example, in the 1980's, when the economy was at a major high, inflation fell from 13% all the way to 4%. That’s an incredible drop for such a short period of time. Another good demonstration of a healthy economy with low secondary effects of inflation is time period between the Korean Vietnam Wars. During this time the countries economy expanded at an annual average of 3.5% while the inflation rate stayed at a minimal amount. Our central bank, along...