Personal Finance 101: If only we have zero or negative inflation, that would be good, right?

Personal Finance 101: If only we have zero or negative inflation, that would be good, right?

I love higher income every year, what about you?

I am sure you will say, “me too!” Truth is, everyone loves to have higher income every year even if we are just doing the same thing. Well, there’s something called inflation. That’s briefly described as demand increasing faster than supply. Thus, the prices would move up and this is why the price of goods and services would continue to increase every year too.

Do you still remember the typical inflation numbers for Malaysia? Nope, far from 3 percent every year, it fluctuates. In fact, there were times when it was negative inflation yeah. Take a look at the chart below from tradingeconomics.com

Please never wish for zero inflation or even negative inflation yeah

This is what investopedia says when inflation is below zero. In other words, deflation.

• Deflation is harmful to an economy because it can cause a spiral of reduced economic activity.
• Central banks will fight deflation by expanding the monetary base and lowering interest rates.

By the way, if there is a reduced economic activity, it also meant that some will be losing their job too. When the demand is lower, there is no need for additional manpower. Some may have to be retrenched or the firm may be in financial trouble. When this happens, the central bank will reduce the interest rate so that more people will have to take out their money from the bank and use it to invest so that they could get better returns.

Low inflation is usually encouraged by all economists. High inflation is hated by all. Meanwhile zero or even below zero inflation may not bring such good news. Happy understanding.

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