# Why isn't high inflation along with robust welfare a 'good' system?

High inflation, by definition, means that the demand for goods and services is higher compared to the demand for currency. In other words, people are more willing to give up currency for goods and services.

Therefore, high inflation brings opportunities for able people to provide goods and services and earn their livelihoods.

The downside of course is that, those who aren't able to produce goods and services may suffer, if their savings are insufficient. However, they can be covered by a robust and guaranteed welfare program.

Therefore, it seems to me that issuing large amounts of currency and assuring welfare with it makes for a fairer distribution of economic resources and opportunities.

Why, then, is high inflation considered undesirable?

[I have learnt from this forum and elsewhere that a small positive inflation is considered desirable. My question is why doesn't the same apply to high inflation.]

• It is interesting that instead of answering, people prefer idle down-voting 😊 – Ritesh Singh Mar 5 at 15:00
• @1muflon1 I of course was not asking about moral philosophy. I was mainly interested to know why high inflation is abhorred traditionally. I am sorry if it was unclear. I have edited the question to clarify this. – Ritesh Singh Mar 5 at 15:13
• Ok, I will provide an answer. However, if you actually did some research on this topic you should consider linking it in your question. That would improve the quality of the question, and I can't speak for the people who downvoted this question, but it would earn at least my upvote. We do not require some lengthy literature review but at least some show of minimal effort of solving issue before posting to this site – 1muflon1 Mar 5 at 15:26
• Thank you for the edit I removed the automatic comment – 1muflon1 Mar 5 at 16:15
• With high inflation, eventually, no one has sufficient savings. – Rodrigo de Azevedo Mar 5 at 16:37

There are several reason for that.

First, issue here is that you are talking about high inflation. Most economists are in favor of small inflation (around 2% per year for reasons you can read about in this and this old Economics.SE answers).

Second, inflation does not generally have the beneficial properties you ascribe to it. Inflation can stimulate output in the short-run but in the long-run the same level of inflation does not provide stimulus to the economy anymore (see discussion of this in any standard macro textbook such as Blanchard et. al. Macroeconomics: A European Perspective or Mankiw Macroeconomics). Consequently, in the long-run inflation does not increase opportunities for employment. Inflation, by itself, is not able to permanently raise real output.

Third, inflation has various costs. A non-exhautive list includes:

• increase in uncertainity and volatility. This holds exclusively for high levels of inflation since modest levels of inflation are not associated with increase in uncertainty and volatility. Higher uncertainity and volatility is generally bad for the economy as it leads to less investment and lower economic growth (see discussion in Mankiw Macroeconomics or Wilson (2006)).

• next there are shoeleather costs of expected inflation. As explained in Mankiw Macroeconomic:

One cost is the distorting effect of the inflation tax on the amount of money people hold. As we have already discussed, a higher inflation rate leads to a higher nominal interest rate, which in turn leads to lower real money balances. If people hold lower money balances on average, they must make more frequent trips to the bank to withdraw money—for example, they might withdraw \$50 twice a week rather than \$100 once a week. The inconvenience of reducing money holding is metaphorically called the shoeleather cost of inflation, because walking to the bank more often causes one’s shoes to wear out more quickly

Of course, the above is written for undergraduates, it is not really the cost of new shoes that is biggest cost here, but opportunity cost of wasted time and general costs of adjusting to the inflation.

• High inflation causes menu costs. These are costs firms incur to change prices (see Mankiw Macroeconomics).

• High inflation tends to be more volatile and this complicates financial planning and distorts peoples intertemporal choices (again have look at Mankiw Macroeconomics).

The list above is not exclusive, the point is that high level of inflation has many costs associated with it. These costs increase disproportionally as inflation becomes higher, while at some point very high inflation won't even necessary have any short run benefits because the increase in uncertainty will depress economic activity more than the output get stimulated by the effect of short run effect of increase in prices.

Consequently, maintaining high level of inflation is considered very inefficient by most economists. This, however, does not hold for low inflation (1, 2 or even 4%) as explained in the beginning.

• Comments are not for extended discussion; this conversation has been moved to chat. – 1muflon1 Mar 5 at 23:10
• this post is getting automated suggestions from the system for too many comments please continue the discussion in the chat if you want – 1muflon1 Mar 5 at 23:13
• I have already done so. – Steve Mar 6 at 9:36