Even mild inflation is risky
Some prominent economists who have important positions in international institutions recently began to talk and write on the possible contribution that a mild bout of inflation could have in salvaging the eurozone economy. They say that the adjustment of different cost, productivity, exchange and interest rates requires different inflation levels in different countries. Without that adjustment, it will be impossible to create an efficient international competition climate, which is necessary for at least modest growth in troubled European countries. In theory, it is logical. However, implementation seems impossible at the present time for technical and, of course, political reasons. When eurozone governments cannot act in accord to implement relatively simple solutions, how can they agree before implementing an idea which is much more complex?
To look at inflation as a life saver is not a new idea. When the economic, social and even political damage created by uncontrolled price increases in the past are forgotten and whenever a crisis appears which causes economic stagnation and a rise in unemployment, the old enemy, “inflation,” begins to be seen as a friendly solution. If that crisis deepens day after day because of the lack of enough private spending, almost all governments and even some prominent economists begin to feel sympathy for inflation. To defend their idea, they prefer to use the phrase “mild inflation” as a technical term.
At first, mild inflation might not be seen as a problem in the interests of increasing growth and employment. However, when that mild inflation begins to turn into creeping, and then galloping, inflation – as has always happened – that “life saver” generally becomes the “killer” of growth and employment. This time, governments have forgotten stimulus packages in haste and begun to implement measures to control the rise in inflation, which naturally kills growth and employment further. Efforts to tame inflation have always been more difficult and more time- and resource-consuming than the fight against recession.
During a recession, when rational measures cannot solve the problems, why is inflation regarded as the messiah? There are very simple reasons. During inflation, the value of existing debts is reduced. Inflation gives an extra stimulus to expenditures when people begin to think buying now is cheaper than buying tomorrow. As interest rates stay below inflation, cheaper credit encourages borrowing and spending. These all seem favorable in an economy which faces deficit/debt problems, slow growth and rising unemployment.
However, some unfavorable things also occur during inflation. If price increases begin to climb over wage increases, wealth transfer from workers to business reduces total demand and, as a result, stops the increase in employment – in contrast to what is expected from the inflationary process. And when inflation is out of control, it becomes necessary to implement some austerity measures that reduce total demand, slowing down growth and employment.
In short, inflation is not a life saver, in Europe, the United States or any part of the world, including Turkey. Monetary expansion, lower interest rates, an increase in public spending are good for growth and job creation only for a short period of time. But after a while, a surge in inflation becomes unavoidable. It must be understood that this is not a competition between gas and brake pedals. People of my age remember well how many times the economy collapsed because of galloping inflation created by fiscal instability.