Why Inflation is Such a Big Problem
High inflation is a phenomenon that many people from Latin America are familiar with, however few might remember it or really understand it. Mexico’s 179% inflation rate in 1988, Argentina’s 53% inflation rate in 2019, and Venezuela’s 2,000,000% in 2019 inflation rate is an aspect or Latin America economies that many make haste in forgetting. The current spike in inflation in the US is not closely comparable to those of Mexico, Argentina, or Venezuela, however there are some lessons in understanding such events.
First, the collapse in narrow markets such as the Banking Sector, the housing sector, or the manufacturing sectors can leave some sectors of the economy unscathed or even benefiting of such events, inflation on the other hand affects everyone since the inflationary forces become prevalent and the constant increase in prices become a problem to all sectors of the economy.
Second, there are very few benefits from the vicious circle between increases in wages and increases in prices. As prices rise, wages follow, and as wages increase prices follow. The dynamics between wage increases and prices increase creates an inflationary spiral that can only be stopped by aggressive restrictive fiscal and monetary policy and a sudden stop to consumption which results in higher unemployment and overall social setbacks.
Lastly, higher inflation expectations also discourage lending since banking institutions will be reluctant to make loans at lower rates today when they can do it at higher rates tomorrow which tends to make credit less accessible and most likely to be restricted to minorities first as historical data has very much proven.
It is impossible to forecast with accuracy the level of future inflation, however what is clear is the need that businesses to incorporate the possibility of higher inflation into their analysis.