Inflation is harmful. Always?

Inflation is defined as increase in prices of goods & services. It sounds so bad but not for all of us. Periodically, central banks announce their target inflation according to their need for sustainable economy.  USA Reserve Bank announce target inflation as %2 whereas European Central Bank announce smaller than %2. Have you ever wonder why countries target inflation is %2 instead of %0? Why %0 inflation is bad for economy? In this short article, I'm going to explain the benefits of the low and stable (%2-%3) inflation.

In my previous article, I explained `Deflation Can't Hurt Us. Really?` and in there I mentioned that lower prices means lower revenues for firms. It can cause unemployment, wage cuts and eventually low purchasing power for economy. Therefore, %2 inflation rate is better than deflation for sustainable economic growth.

As I mentioned, deflation means wage cuts whereas inflation means wages are raising. In short-term, it has benefits such as increasing productivity. Studies show that If wage of employees increase, productivity of employee increase also. But why it has just short-term benefits? Because, in long-term period, Inflation will show the bad side and actually employees will realize that rising wages didn't benefit them so much. For example; Frank has monthly wage which is $1000 and he spent all his money to buy 10 $100 shirt. After Frank's monthly wage increase from $1000 to $1500, logically he could buy 15 $100 shirt yet because of inflation now one shirt cost $150. Therefore, actually Frank didn't have benefit despite his wage raised. However, still in short-term it will have benefits to firms and economy. This is also called money illusion.

Secondly, Mediocre Growth can be very terrible for economies. IMF and World Bank warn the countries every year about `How dangerous mediocre growth is`. What is the solution? Sustainable Inflation rate (%2-%3) helps economy to grow.

Another theory is, inflation makes poor,poorer and rich,richer. Therefore, upper-middle and upper class can accumulate capital faster which means higher investment for the country. Logically, higher investment is equal to higher development and economic growth.
Some causes of inflation can be either bad or good for the economy. High Inflation leads low currency (Macroeconomics) and this will make countries export increase which I mentioned  Strong Dollar Strong Economy article. Anyway, of course it depends of the countries Export and Import ratios. If It is a country like Turkey where import numbers are twice more than export, this is good way to increase export.

Conclusion
Yes, inflation is `partly` harmful.However, low and stable inflation has huge benefits for the economies. In my point of view, stable inflation rate is much better than deflation. Moreover, almost all central bank target inflation rate between 2% and 4% for healthy economy. On the other hand, all countries characteristics, economical view and targets help them to decide the `target percentage`. While %3 inflation rate can be so much for the country, %4 can not be enough to growth. That's why, every country has different targets and achievements about inflation.

I tried to explain the advantages of inflation in basic and simply way for regular people. If you have any question or comments don't hesitate to share with us!