We invite you to do a test: go out and ask ten people if it seems positive or negative that prices rise. Without more data, at least nine will tell you that it is bad. They are right? What else is missing in the question to be able to consider an upward trend in prices as detrimental to the progress of a country’s economy? Let’s talk about the IPC.
Let’s go with a little macroeconomics for dummies !
CPI, inflation and deflation
We need to have clear basic concepts first of all. The CPI (Consumer Price Index) is an indicator that measures the variation of the prices of products in an economy. When the CPI rises, that is, prices are constantly rising, we say that there is inflation . On the other hand, we know it as deflation or negative inflation at a time of sustained price decline.
In any economy, it is usual to live with inflation . Affirming that this is good or bad depends on the point of view we take. We are going to analyze it from the perspective of each economic agent and then see it with a global approach.
How the variation in prices affects the different economic agents
If we could only answer with one word, it would be a huge DEPEND. Now you will understand why.
Inflation has a direct consequence: it makes money worth less. With the same amount of money, as prices are higher, citizens can buy fewer products. Therefore, a price drop (negative CPI) is good for the consumer since he can buy more goods and services for the same price. Of course, provided that their purchasing power (difference between variation in prices and variation of pensions and salaries) is greater.
Some economic theories, like that of the Austrian School, defend that deflation does not only benefit the consumer. When prices fall, demand increases, also benefiting companies and causing them to hire more personnel. The reality is that it is not that simple because consumers postponed their purchases while waiting for new price drops. As many other times, the human factor is the key.
From the point of view of the companies , a rise in prices increases their income, but at the same time it reduces their competitiveness as exporters. Other factors enter here, such as the elasticity of the products they sell. Do you begin to understand that great “depends”?
An economic agent that does hurt a strong inflation is the investors. If you invest 1000 euros today, you are forgoing to spend them on consuming goods and services for that value. Inflation makes that prize for giving up to consume is reduced to have less value invested money.
Here, the return obtained from the investment and the difference with inflation would also come into play: if you obtain a return of 2% and inflation is 3%, you are losing purchasing power. In fact, some financial products are referenced with inflation.
Is there an ideal situation?
It is considered that inflation below 2% is beneficial for the economy in general . With GDP also rising production will increase, unemployment will fall and, as long as social measures collaborate, growth will also benefit citizens. However, this is also a bit relative.
As we have explained to you on many occasions, in economy two plus two does not have to be always four.