We hear about “inflation” frequently, but what exactly is it? Inflation is defined as a persistent increase in price levels, which in turn lowers the purchasing power of money. Amidst this pandemic, inflation has managed to have catastrophic impacts on some developing countries. Several of the major developed countries have also fallen prey to the adverse impacts of inflation. However, it has also had a positive impact on many countries.
So exactly what are the effects of inflation? In the case of Europe, inflation has been linked to an easing of debt. As a basic example, if Europe has a debt of 15%, and inflation rises by 5%, debt would decrease by 5%. Despite this positive point, we cannot ignore the damage caused by inflation. An increase in inflation creates an increase in interest rates and overall prices in the economy. Furthermore, it creates an accumulated cash flow and can cast a negative impact on the reliability or creditworthiness of both public and private sector funds.
Inflation also hinders the inflow of tax revenues and can induce pessimism in investors triggering both a reduction in investment and production. Moreover, it is imperative to note that inflation causes a rise in prices, which naturally leads to a fall in demand, and that can cause unemployment. The lack of sale of goods increases inventory levels, decreases businesses’ profitability and subsequently causes and increase unemployment.
Finally, inflation is directly linked with the prices of inputs or raw materials such as oil etc., and the increased prices of raw material causes cost-push inflation. Many people think that increased inflation will improve the economy, forgetting the fact that it was the low rate of inflation and lower CPI that helped Europe combat the economic crisis in 2009. If the prices had not been as low, many more families would have been subjected to unemployment.
Despite its drastic impacts, Inflationist believes that the monetary policy of Europe’s central bank could cancel out all the negative results of increased inflation. This monetary policy would require the country to buy back all money that has been issued, so that the Central Bank can then avert the scope of interest rates, rising alongside the inflation. Nevertheless, this measure would require an immensely high level of investment and the government would need to be very vigilant about its spending.
In light of the above-mentioned issues, such actions could drastically impact the overall economy of Europe. This policy could correct the economy by slowing it down creating far more damage than expected.
