The New Yorker's James Surowiecki (a former Motley Fool writer) gives a nice description of our often misguided abhorrence of inflation:
The distaste for inflation is such that a 1996 study (titled, aptly, "Why Do People Dislike Inflation?"), by the Yale economist Robert Shiller, found that, in countries around the world, sizable majorities said that they would prefer low inflation and high unemployment to high inflation and low unemployment, even if that meant that millions of extra people would go without work ...
So why is inflation unpopular? The biggest reason, Shiller found, was simply that people believe higher prices reduce their standard of living and make them "poorer." This is obviously true for people living on fixed incomes or off their savings, but for everyone else, as many studies have shown, inflation translates into higher incomes as well as higher prices, and it typically doesn't have much of an effect either way on people's standard of living. (After all, we've had sixty years of inflation in the postwar era, yet we're much more prosperous than we were in 1950.) That's not how it feels, though: myopia leads us to focus on how much more we have to pay, rather than on how much more we earn.
I'm not here to extol inflation; I think we'd generally be better off without it, if only because its absence is the surest way to force debtors to behave. But Surowiecki is absolutely right: Inflation's neutralizing forces -- nominal income gains that offset nominal price gains -- are often overlooked.
The appropriate counterargument, as Surowiecki mentions, is that inflation erodes saved wealth. This is true, but still incomplete for the same reason people misjudge inflation's impact on personal incomes. If you're worried about rising prices, one of the best bets you can make is in companies able to raise prices alongside inflation. Remember how much money ConocoPhillips
Disagree? I know many of you will. Hit me in the comment section below.
