Re: A conversation about inflation
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There are a lot of other factors to consider. However, I think that a very strong case can be made that inflation benefits the borrower, i.e. the consumer. The opponents of the FED will constantly talk about inflation being a "tax," but overlook the fact that it actually is a tax in favor of a borrower, who is spending money. They often say that the tax is against the lender and investor.
[/ QUOTE ] In the short run. If inflation is running at around 2%/yr, then increases to 4%/yr unexpectedly, this increase will be uncompensated for in lenders' projections, causing the consumer to win.
But this changes very quickly. Lenders expect inflation to remain higher, so they charge a higher interest rate. Now society is essentially back where it started, except with a higher interest rate and more inflationary uncertainty, resulting in a larger risk premium demanded by lenders to compensate.
The solution to this is to keep inflation running at one steady, predictable, and relatively low level. The most important component of inflation is not the actual amount of money in circulation, it's the amount of inflation people EXPECT to occur.
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