Is Inflation Always Bad? What MMT Says About Price Stability

Explore what Modern Monetary Theory (MMT) says about inflation and price stability. Learn how inflation isn’t always bad and how it impacts your finances.

Introduction

Inflation—just the word can stir up unease. Most people associate inflation with higher prices, shrinking wages, and the fear of economic instability. Traditionally, inflation is viewed as an economic villain, causing a decrease in purchasing power and making it harder for everyday individuals to get by. But is inflation always a bad thing? Could there be scenarios where it’s actually a sign of economic health? And if so, how do we understand it through the lens of Modern Monetary Theory (MMT)?

MMT offers a different perspective—one that challenges the conventional wisdom about inflation. It introduces new ways of thinking about the role of government spending, the money supply, and, importantly, the idea that inflation isn’t something to be feared in all circumstances. In fact, MMT suggests that inflation is not inherently bad and, when managed properly, can contribute to economic stability and growth.

In this article, we will explore what inflation is, how MMT views it, and how understanding these ideas can empower your financial decisions. By the end, you’ll see that inflation isn’t just a factor that affects the economy, but a concept you can navigate to your advantage.

What is Inflation? A Brief Overview

Inflation is the rate at which the general level of prices for goods and services rises, causing a decrease in the purchasing power of money. Simply put, when inflation rises, the same amount of money buys less than it did before. We’ve all felt this when grocery bills seem to climb higher or when everyday products, from gas to milk, become more expensive.

Inflation is typically measured using various indexes, such as the Consumer Price Index (CPI), which tracks changes in the cost of goods and services over time, and the Producer Price Index (PPI), which focuses on the price changes that producers face.

Types of Inflation

Demand-pull inflation: This type of inflation happens when there is too much demand for goods and services in the economy, outstripping supply. The classic scenario is when an economy is growing rapidly, and consumers and businesses push demand past the capacity to supply goods.
Cost-push inflation: This occurs when the cost of production rises. If businesses face higher wages, raw material prices, or energy costs, they typically pass these increases onto consumers in the form of higher prices.
Built-in inflation: This is a self-perpetuating cycle where businesses and workers expect higher inflation in the future, which leads to rising wages and prices. As wages go up, businesses raise prices to cover their increased costs, which can perpetuate further inflation.

Inflation is often seen as inevitable in an economy, but how we perceive it—whether as a danger or as something manageable—depends on our understanding of its causes and effects.

MMT and Inflation: A Revolutionary Perspective

Modern Monetary Theory (MMT) is an economic framework that challenges much of the traditional thinking around money, inflation, and government spending. One of its central tenets is that inflation doesn’t always result from excessive government spending or a booming economy; rather, inflation is closely tied to how much of the economy’s productive capacity is being utilized.

Core Concepts of MMT

Government Spending and Money Creation: In MMT, a government that issues its own currency (like the U.S. does with the dollar) does not need to rely on taxes or borrowing to finance its spending. Instead, it can create money. While this may sound reckless, MMT emphasizes that inflation is not automatic when a government increases the money supply. Inflation depends on how much economic capacity is available to meet rising demand.
Inflation Management Through Policy: Rather than fearing inflation as an inevitable consequence of more money, MMT suggests that inflation can be managed through policies such as taxation and bond issuance. These tools can help absorb excess money from the economy and prevent overheating.
Full Employment: MMT stresses the importance of full employment. When there are unused resources in the economy, including labor, it can cause inflationary pressures. By ensuring that everyone who wants to work can find a job, the economy can achieve full capacity without triggering runaway inflation.
Inflation as a Signal: MMT views inflation as a signal that the economy is approaching its full potential. In a scenario where demand exceeds supply, inflation is a warning that policymakers need to adjust their approach to maintain balance.

Is Inflation Always Harmful?

The conventional view often sees inflation as an unmitigated disaster, eroding savings and making things more expensive. But according to MMT, inflation is more complicated than simply “good” or “bad.” It is not inherently harmful when it’s moderate, and, in some cases, it can be a sign of a flourishing economy.

How Inflation Can Be Beneficial

Debt Erosion: Inflation can reduce the real burden of debt. For individuals, as well as governments, inflation lowers the real value of debt. A $100,000 mortgage that costs $1,000 per month will be much easier to pay back if inflation erodes the real value of money.
Encouraging Spending and Investment: When inflation rises, consumers and businesses are more likely to spend and invest rather than hoard cash. This behavior can stimulate economic activity, supporting growth and job creation.
Wage Growth and Employment: Inflation is often linked to higher wages. When businesses experience demand for their goods or services, they tend to hire more workers and raise wages to meet that demand. A moderate level of inflation can thus lead to lower unemployment and increased purchasing power.

The Risks of Uncontrolled Inflation

On the flip side, unchecked inflation can lead to significant problems:

Decreased Purchasing Power: Excessive inflation means that wages don’t stretch as far. If the price of everyday goods rises faster than wages, people’s standard of living suffers, and it becomes harder to afford basic necessities.
Rising Interest Rates: Central banks often respond to high inflation by raising interest rates. This increases the cost of borrowing, slowing down investment and consumption and leading to a potential economic slowdown.
Currency Devaluation: Hyperinflation can erode confidence in a country’s currency, causing it to lose value compared to other currencies. This can lead to a crisis of confidence in the financial system and international markets.

What Can You Do About Inflation?

Inflation is something that impacts all of us, but there are steps you can take to protect your finances.

1. Invest in Inflation-Resistant Assets

Assets like stocks, real estate, and commodities such as gold and silver are commonly considered good hedges against inflation. These assets typically appreciate over time and tend to grow faster than inflation.

2. Diversify Your Income Streams

If your only source of income is a salary, inflation can hit you harder. Consider diversifying your income with side hustles, passive income investments, or business ventures. This helps you mitigate the risks associated with inflation.

3. Adjust Your Budget

Track your spending carefully, especially in categories that are sensitive to inflation, such as groceries, healthcare, and gas. You may need to adjust your budget and make cuts in discretionary spending to accommodate rising prices.

4. Maintain a Long-Term Focus

Inflation can create short-term challenges, but keeping an eye on your long-term financial goals can help you stay focused. Investing for the future and focusing on retirement savings can help you outpace inflation over time.

How MMT Could Change the Way We View Inflation

MMT offers a fundamentally different view of inflation. Rather than seeing inflation as something to be avoided at all costs, it redefines inflation as a signal of economic activity. When inflation rises, it isn’t necessarily a bad thing—it may simply mean that the economy is nearing its full capacity.

Furthermore, MMT offers a more active approach to managing inflation. By using government policies like taxation and strategic fiscal measures, inflation can be kept in check without needing drastic interest rate hikes or austerity measures that often harm ordinary people.

Conclusion

Inflation is a complex issue, but it’s not inherently bad. Through the lens of Modern Monetary Theory (MMT), we see that inflation can be managed and, in some cases, is even a sign of a growing economy. By understanding how inflation works and how MMT addresses it, you can make more informed decisions about your financial future.

Rather than fearing inflation, focus on how it can be managed and how you can protect your finances through smart investment strategies, diversification, and long-term planning. Inflation, when understood and managed, doesn’t have to be the enemy—it can be a tool for economic growth.

Frequently Asked Questions

What is the main idea behind MMT?
- MMT argues that governments that issue their own currency can create money without relying on taxes or borrowing. It also emphasizes full employment and inflation management through fiscal tools.
How does inflation affect my savings?
- Inflation erodes the purchasing power of money, meaning your savings lose value over time unless they grow faster than inflation. Investing in inflation-resistant assets can help protect your wealth.
Can inflation ever be good for the economy?
- Yes, moderate inflation can be beneficial. It signals a growing economy, encourages spending and investment, and helps reduce the real burden of debt.
What role do central banks play in controlling inflation?
- Central banks manage inflation primarily through interest rate adjustments. When inflation is high, they may increase interest rates to cool off demand, which slows economic activity.
Is MMT the solution to inflation problems?
- MMT offers a new framework for managing inflation, focusing on government spending and policy tools like taxes. While it’s not a universal solution, it offers fresh perspectives on inflation control.
How does inflation impact investments?
- Inflation can reduce the real return on investments, but assets like real estate and stocks typically outpace inflation, making them good investments in inflationary environments.
What steps can I take to protect my finances from inflation?
- Consider investing in inflation-resistant assets, diversifying your income, and adjusting your budget to cope with rising costs.
What is the difference between demand-pull and cost-push inflation?
- Demand-pull inflation happens when demand exceeds supply, while cost-push inflation is caused by higher production costs.
How can MMT reduce unemployment?
- MMT advocates for full employment through government spending programs that create jobs and stimulate economic activity.
How can I hedge against inflation in my portfolio?

Diversify your investments into real estate, stocks, and commodities, which have historically outpaced inflation over time.

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