Non-Economists Often Say That Inflation Makes the Nation Poorer

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The Answer is Whenever prices go up,the buyers are made poorer by the amount of the price increase; but the sellers are made richer by exactly the same amount.Therefore when we consider the nation as a whole,it is neither richer nor poorer because of inflation,though there has been a redistribution of the wealth from buyers to sellers.There are at least two actual costs of inflation.The first is that inflation redistributes income from people who cannot or do not raise their prices to those who do.Though the nation as a whole is not poorer,a feeling of injustice has been created that can adversely affect the workings of the economy.The second cost is that inflation reduces the amount of information that prices convey and causes people to make choices that do not reflect relative prices.If the absolute prices of everything change in the same proportion,relative prices remain the same and decisions should not change.If relative prices change,then people should buy less of those goods that have become relatively more expensive and buy more of those that have become relatively less expensive.During inflation,however,consumers find it difficult to distinguish between a change in absolute prices and a change in relative prices.

Non-Economists Often Say That Inflation Makes the Nation Poorer

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