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Inflation: It's not always a bad thing

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REUTERS/Christian Charisius

(Read caption) A worker adjusts a sign at a gas station in Germany. Biofuel usage is surging worldwide. In Germany, the government is concerned about the petroleum industry mixing higher levels of biofuel into the nation's gas pumps. Biofuel is consuming increasing levels of grains that were once used for food and feed.

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If you've filled up lately or shopped for groceries, you know that prices have increased sharply in recent week. Which leads to a new economic concern: inflation.

The easy-money policies of the US Federal Reserve probably helped sparked inflation. But that's not necessarily a bad thing. Most economists agree that modest inflation is better than the alternative, deflation, which was a big concern only last year.

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If inflation is fire, deflation is ice. Deflation freezes consumer spending as people wait for prices to fall. Inflation actually boosts economic activity as people buy at today's prices so they won't have to pay more later.

Mideast uncertainty has exacerbated inflation by driving up energy prices. We're probably experiencing the worst of that uncertainty.

But even if oil normalizes soon, food and other commodities probably will not. Economic growth in China, India, Brazil, and elsewhere is tapping raw materials and food supplies worldwide. That will continue and even increase as more mature economies such as the United States and Europe expand. Bottom line: Playing with fire is dangerous. But right now, if it doesn't get out of hand, a little inflation may be a good thing.


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