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Inflation and Economic Vibrancy

It is conventionally believed that inflation is brought about by robust economic activity, and that it is a sign that things are going well.  In the U.S., and most of the developed world, we've been languishing with a very tepid recovery for the past 4 years, which has been accompanied by very low inflation statistics, as fed to us by our governments, and very low interest rates.  Our Fed Chairwoman and her fellow Fed Governors would like to see inflation rates increase in the U.S.

There is a belief among Keynesian economists that deflation, or an environment in which prices drop, might cause people to delay their purchases, believing that if they wait prices will be lower, and that these delays will lead to a veritable death spiral of lower sales, lower prices, and lower employment.  I believe that lower prices actually stimulate spending.  For me, cheaper prices motivate me to consider buying, and I’d bet this is true for most people.

I was curious to see the correlation of inflation rates with economic success and decided to do a little digging.  Below is a list of the “winners” in the inflation race according to the IMF website, with the first number reflecting annualized inflation and the second GDP growth.  It isn’t too hard to see that inflation is not something to be coveted, and that it seems to mostly outstrip economic growth, thereby destroying value.  In any event, the list below seems to serve as a fairly strong statement against inflation.

Country Annualized Inflation  GDP Growth
Venezuela 51.0% -0.5% X
Sudan 20.0% 2.7% X
Iran 20.0% --
Argentina 21.0% 3.0% X
Yemen 10.4% 5.1% X
Egypt 10.7% 2.3% X
Pakistan 8.8% 3.1% X
Turkey 7.8% 2.3% X
Nigeria 7.3% 7.1% X
Russia 6.5% 5.6% X
Vietnam 6.3% 0.2% X
S. Africa 6.3% 2.3% X
Brazil 6.3% 1.3% X

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