15.1 Inflation or deflation ?

While entrepreneurs like to rise prices and achieve highest margins and profits possible, after they accumulated enough money the overall inflation starts to be their worst enemy. It erodes their saved profits and so „old“ owners tend to promote „price stability“.

It is a time related change of preference:  active businesspeople like inflation, retired rich oligarchs hate it and prefer even deflation.

Why it is so ?  What is better:  inflation or deflation ?

The answer is obvious:  moderate inflation is the best.

Some people still don´t understand it and think that if prices are falling ( deflation), they will be better off as they will be able to buy more and inflation is robbing away their money.
But they couldn´t be further from truth.

Imagine a business that has  bought some buildings, machinery through loans and  cars,  equipment on leasing.
They have to pay every year the same number of installments, have certain fixed costs, amortization.
Every business plan counts with annual increases of sales at least for some %, together with some % increase for wages.  As fixed costs and installments are not changing, each year is business doing better and better  as increases in wages are more than offset by increases in sales.

Even poorly constructed business which made some mistakes at the beginning can survive and prosper as each year of inflation is bringing in additional funds, making fixed costs smaller relative to sales.

So moderate inflation is a big friend of active businessmen and is indeed promoting risk taking, as it can help „fix“ certain problems startups are facing, mainly related to fixed investment.

You don´t even have to be an entrepreneur to understand it. 
Imaging you take out a mortgage:   every year your salary will be a bit higher, so your mortgage repayments ( even they represented at the beginning quite a big share of your disposable income) are getting more and more manageable as time passes by.

On the contrary, if prices are falling businesses are facing with opposite situation: their business plans are not met and their fixed costs are getting bigger and bigger relative to achieved sales.

Obviously, they have to react somehow and they do it by only way they can to survive: by reducing wages and headcount.

So people who think that they will be better off during deflation will most likely find themselves unemployed, wandering why they cannot benefit from such ever lower prices as their salary is now zero.  And they still have to pay their mortgage installments, which did not decrease at all !

It is crystal clear. 
You can ask any real business  owner whether they would prefer

A)     annual inflation of 3 % and they would have to give 3% rise in salaries or
B)      they have to explain their employees that they have to take wage cut 3% as sales have fallen by 3%

All of them ( not just 80 or 90%) will go for option with inflation.


So moderate inflation is a big promoter of economic growth and helps drive business activity and risk taking.
Opposite, deflation deters starting new businesses and has terrible devastating results on existing ones.

Even the most lazy and incompetent rich man will try to invest his money somewhere during period of higher inflation and thus will generate jobs and economic growth.
This is the way inflation helps to move the economy:  if you stay idle, your money loses value. Therefor you have to keep moving ( doing business,taking risks, inventing, employing people...)