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Is inflation a good or bad thing for consumers?

Mediafeed Logo By Rebecca Lake of Mediafeed | Slide 2 of 11: Answering the question of whether inflation is good or bad means knowing more why inflation matters so much. The Federal Reserve takes an interest in inflation because of how it relates to the broader economic and monetary policy.Some level of inflation in an economy is normal, and an indication that the economy is continuing to grow. While inflation has remained relatively low over the past decade, it has historically seen the most change during or right after recessions.The Fed believes that its 2% target inflation rate encourages price stability and maximum employment.Broadly speaking, high inflation can make it difficult for households to afford basic necessities, such as food and shelter. When inflation is too low, that can lead to economic weakening. If inflation trends too low for an extended period of time, consumers may come to expect that to continue, which can create a cycle of low inflation rates.That sounds good, as lower inflation means prices are not increasing over time for goods and services. So consumers may not struggle to afford the things they need to maintain their standard of living. But prolonged, low inflation can impact interest rate policy.The Federal Reserve uses interest rate cuts and hikes to keep the economy on an even keel. For example, if the economy is in danger of overheating because it’s growing too rapidly or inflation is increasing too quickly, the Fed may raise rates to encourage a pullback in borrowing and spending.Conversely, when the economy is in a downturn, the Fed may cut rates to try to promote spending and borrowing. When both inflation and interest rates are low, that may not leave much room for further rate cuts in an economic crisis, which may spur higher employment rates. If prices for goods and services continue to decline, that could lead to a period of deflation or even a recession.So, is inflation good or bad? The answer is that it can be a little of both. How deeply inflation affects consumers or investors–and who it affects most–depends on what’s behind rising prices, how long inflation lasts, and how the Fed manages interest rates.

Is Inflation good or bad?

Answering the question of whether inflation is good or bad means knowing more why inflation matters so much. The Federal Reserve takes an interest in inflation because of how it relates to the broader economic and monetary policy.

Some level of inflation in an economy is normal, and an indication that the economy is continuing to grow. While inflation has remained relatively low over the past decade, it has historically seen the most change during or right after recessions.

The Fed believes that its 2% target inflation rate encourages price stability and maximum employment.

Broadly speaking, high inflation can make it difficult for households to afford basic necessities, such as food and shelter. When inflation is too low, that can lead to economic weakening. If inflation trends too low for an extended period of time, consumers may come to expect that to continue, which can create a cycle of low inflation rates.

That sounds good, as lower inflation means prices are not increasing over time for goods and services. So consumers may not struggle to afford the things they need to maintain their standard of living. But prolonged, low inflation can impact interest rate policy.

The Federal Reserve uses interest rate cuts and hikes to keep the economy on an even keel. For example, if the economy is in danger of overheating because it’s growing too rapidly or inflation is increasing too quickly, the Fed may raise rates to encourage a pullback in borrowing and spending.

Conversely, when the economy is in a downturn, the Fed may cut rates to try to promote spending and borrowing. When both inflation and interest rates are low, that may not leave much room for further rate cuts in an economic crisis, which may spur higher employment rates. If prices for goods and services continue to decline, that could lead to a period of deflation or even a recession.

So, is inflation good or bad? The answer is that it can be a little of both. How deeply inflation affects consumers or investors–and who it affects most–depends on what’s behind rising prices, how long inflation lasts, and how the Fed manages interest rates.

© Yingko/istock

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