Inflation Case

Inflation is one of the most important concepts in economics. Defined simply as a rise in prices, an increase in inflation along with its cost to the economy usually brings fear and worry to many people.

To economists, inflation comes with many costs to the economy. With the inflation that is expected, the costs include the shoe-leather cost, the menu cost, relative price distortions, unfair tax treatment and general inconvenience. When the inflation is unexpected, it arbitrarily redistributes wealth among individuals and increases uncertainty. Although has many cost to the economy, some economists believe a little inflation might be a good thing as it allows the real wages to reach equilibrium levels without nominal wage cuts and therefore improves the functioning of labor markets.

But to the other people, inflation is definitely not a good thing because of the common misperception that people usually have: they tend to think that higher prices reduce their standard of living along with their real wages and make them "poorer". Their belief is obviously true in the short run when the nominal wages are fixed by the contract. But in the long run, the price become more flexible, real wages catch up with price level, and therefore it typically doesn't have much of an effect either way on people's standard of living.

As most of people don't have a deep understanding about economics and tend to only see the economy in the short run, the misperception about inflation is likely to be the main reason that spreads the fear of inflation rather than the true cost of inflation itself.