Why inflation now is good

Keynesian economics recommend that in an economic depression, the correct course of action should be to encourage spending and discourage saving. Governments should borrow money and boost demand by pushing the money into the economy. That's why countries like the US, UK, Japan, China, Malaysia and others are lauching huge stimulus packages for their conomies. Their aim is to stall any recessionary tendencies and hopefully set the economies on a growth path.

But what if the stimulus spendings don't work? Then, the country would go into recession, or worse, depression. The economy will slow down and jobs will be lost. In such a scenario, deflation may come into play. This means that price of goods and services will be lowered. Salaries too may drop.

However, debts such as home mortgages and business loans are in nominal trems (not adjusted for inflation). By this, it means that in a deflationary situation, your loans become more difficult to service. The instalment payment is a larger portion of your decreased salary. More people may default on their payments. This leads to more gloom in the economy.

But, if the extra injection of funds makes the economy sputter along and results in a modest inflation, then prices will move up. So too will your salary. Luckily, your loan remains the same. So, your instalment payment becomes slightly easier. This leaves you with more cash to spend which hopefully will boost the economy a bit. That's why it is important and good to have inflation in bad economic times.