THROUGHOUT the course of the coronavirus pandemic, one common complaint I’ve heard from people is that things are getting expensive.
But I would argue that’s actually a good thing. It’s a good thing in the sense that it could get a whole lot worse, because although consumers are suffering (and there’s no doubt they are), at least it hasn’t led to an economic meltdown (for now). This is true for economies all over the world right now.
This is because healthy inflation is caused by consumption. More consumption leads to more inflation, but it also leads to business profitability, usually MSMEs (Micro, Small and Medium Enterprises).
When prices start to deflate, it means there is decreasing levels of consumption, which means less business, which leads to less employment, which leads to less consumption.
Basically, inflation exists in a healthy economy, whereas deflation happens in a collapsing one. Imagine a business with a going-out sale. That’s basically what happens when you gave a deflationary economy.
And that is why inflation is a good thing. It means that businesses are still in business, which means that there is still employment, which means there’s still consumption, which means there’s still economic activity.
Now, just to be clear, this is not an ideal situation. Economists usually want inflation to rise slowly, not driven up by a pandemic. However, if we’re given the choice between the latter and an economic meltdown, I’d rather have more expensive prices.
So far, my impression with businesses is that they are struggling to stay afloat. If things get worse then we may end up with even more intense inflation followed by a recession / depression, in which case, we’ll end up in a deflationary environment.
On the other hand, if the situation improves then we may see a slowing down of inflation as more businesses return to the market and consumption returns to normal levels./PN
