Get the answer of: Why Inflation is more Preferable than Deflation?
If the choice is between inflation and deflation, most people will probably prefer inflation. The reason is not far to seek. That is to say, it is generally considered worse to provoke unemployment via deflation than to disappoint the rentier via inflation. To be sure, inflation inflicts injustice on the rentier class, whose incomes are fixed and un-adjustable, but it provides the economy, subject to underemployment, with maximum output and employment.
In other words, inflation is better than deflation as far as aggregate production and employment are concerned, but worse than deflation as far as the distribution of wealth and income is concerned. The optimum situation would of course be one in which full employment is maintained side by side with maximum equity in the distribution of wealth and income.
Since inflation, however, hurts those who have a low marginal propensity to consume more than it does those having a high marginal propensity to consume, a distribution of income from the former to the latter, which inflation induces, may well contribute to stability in the long run.
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But the dichotomy between inflation and deflation is a false one, since both are socially undesirable and economically unsound. The crux of the matter is that the smooth functioning of a free-market economy presupposes and requires stability in the purchasing power of money.
Volatile fluctuations in the value of money upset consumption, saving, investment, and employment—all of which are effected or planned by individuals in terms of money and on the assumption of a stable measuring rod of value.
Both inflation and deflation lead to loss of public confidence in the monetary and credit system of the country. For maintaining economic stability and for promoting faster economic growth the value of money need not and should not be allowed to fluctuate so as to jeopardize the whole money economy.
An economy, accustomed to the problem of periodic and chronic underemployment, experiences considerable difficulty in adjusting itself to the problem of full employment and of accompanying inflation. For it is politically more expedient to increase aggregate demand than to deflate the money incomes of the economy.
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Most governments are hesitant to apply vigorous anti-inflationary measures for fear of precipitating a recession. Deflation is so unpopular that the new word ‘disinflation’ has been coined in some quarters to indicate the kind of anti-inflationary deflation that does not develop into deep depression.
The question is of inflation and deflation, which one is more harmful? Of inflation and deflation—the latter proves to be more harmful and damaging than the former owing to the following reasons:
(a) The volume of production, income and employment increase at the initial stage of inflation although they do not increase at its later stage. They may, however, decline when inflation goes out of control of the monetary authorities particularly during runaway inflation. But, the level of production, income and employment fall continuously at all stages of deflation.
(b) Although inflation is unjust as it increases the degree of inequality, its evil effects can be minimised by keeping it under control through appropriate monetary and fiscal methods, but it is very difficult to cure the bad effects of deflation.
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(c) From the standpoint of the community as a whole inflation is not harmful if kept within managerable limit as it increases production and employment. But deflation very often proves to be disastrous.
(d) Monetary measures do not become so much effective in curing deflation as they are in controlling inflation. During deflation the marginal efficiency of investment becomes very low; a mere increase in money supply at that time cannot start a revival as it does not have much effect on the marginal efficiency of investment. But, a reduction in money supply can bring the inflationary boom to an end.
(e) Inflation, especially mild inflation stimulates the economic growth; but deflation retards economic growth and may bring a collapse of the entire monetary (credit) system.
Conclusion:
From the standpoint of the economy as a whole, neither inflation nor deflation is desirable as both bring instability in the economy. The desirable goal is the maintenance of seasonable price-level stability. But some monetary rise in prices may prove to be beneficial to the economy for promoting economic growth in developing countries like India.