Pros and cons of inflation

The UK has experienced a surprise rise in inflation, due mainly to higher prices for tobacco and alcohol. 

In the first increase in 10 months, inflation was at 4% in December, a slight rise on the November figure of 3.9% but one that is "complicating the timing of interest rate cuts" by the Bank of England, said The Guardian. Inflation, though, was still "on track to drop below the Bank’s 2% target by the spring".

Meanwhile, Japan, which has long battled chronic deflation, is now also struggling with inflation. "Stagnant" earnings have "started to show signs of movement" and flat inflation in December has eased pressure on the Bank of Japan, but it is still too early to tell if Japan has "turned the corner toward self-sustaining wage-price increases" or if it will slip back into deflation, said William Sposato on Foreign Policy.

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But what are the pros and cons of inflation, and how exactly does it affect economic decisions and the day-to-day lives of citizens?

Pro: economic growth

Moderate inflation can be a "sign of a healthy economy", said Hunter Ray Barker on Forbes, as it "typically occurs when there is strong demand for goods and services".

The demand "theoretically helps increase production", wrote Sean Ross on Investopedia. More money in the economy "translates to more spending" and greater demand for goods and services. The demand "triggers more production" to meet it, resulting in economic growth when there are unused resources and labour capacity.

Con: possible recession

If there is, however, too much spending compared to the capacity to supply goods and services, then an economy can eventually about-turn into a recession. With high demand and low capacity, prices then surge and consumers begin to stop spending.

When businesses do not have "enough customers and workers can't find enough jobs", it results in a slow down of "buying and spending across the board", said Yahoo Finance.

Inflation does not always "trigger a recession" but it is a factor governments try to "tame" by slowing down spending by using tactics such as interest rate hikes. And though that slowing does not automatically mean a recession, it can create a "self-sustaining cycle" that "very easily" can slip into a recession.

Pro: better wages

Moderate inflation and a productive economy make it easier for workers to receive pay rises and maintain a higher standard of living. With low inflation "relative wages can easily adjust", said the Brookings Institution, and businesses can tailor what they offer employees to "accommodate" their respective "differences in economic fortunes".

If there was zero inflation, it could mean more real wage unemployment (an excess of labour), while too high inflation will result in a real-terms pay cut if wages do not match prices.

Con: fall in value of savings

Inflation that is too high can have an impact on how much savings are worth. Money held in an account with a "lower interest rate than inflation" will mean it is being "eroded" by the cost of living, said The Times Money Mentor.

However, inflation can be good for savers as with "high inflation comes high interest rates", said the personal finance site. When the Bank of England raises the interest base rate to discourage spending, the interest rates on savings accounts should in turn go up.

Most savings accounts, however, "usually don't offer enough interest to beat inflation", and the value of savings steadily decreases, said Business Insider.

Pro: stimulates investment

Moderate levels of inflation can stimulate investment, said Barker at Forbes. Investors are "more likely to invest in assets, research and development, or infrastructure" in a moderate inflation environment if they can expect a return that may "outpace inflation". That, in turn, boosts the economy by creating jobs, higher income and great consumption.

Con: squeeze on public services

Excessively high inflation also causes problems for public spending. When money is worth less, it poses an immediate problem for public services, whose budgets are "set in cash terms" and will not "automatically increase in the face of higher-than-expected inflation", said the Institute for Fiscal Studies. 

It means services, including hospitals and schools, can "purchase fewer goods and services" and face a budget that is "smaller in real terms", causing an "unintended dose of austerity".