Why is a low and stable inflation rate better for long-term economic growth?
Answer (1)
A low and stable inflation rate, usually around 2% per year, is better for long-term economic growth because it creates a predictable environment for consumers, businesses, and investors. When people know that prices are rising slowly and steadily, they can plan their budgets, investments, and business decisions with more confidence. This helps build a strong and growing economy.Let’s break it down. When inflation is too high, prices rise too fast and people’s savings lose value. Imagine a student saving for a new phone. If inflation is at 10%, the money saved this month will buy less next month. This discourages saving and pushes people to spend quickly, which may cause even more inflation. Businesses also find it hard to plan because the cost of raw materials and salaries changes rapidly, making it risky to invest or hire more workers.On the other hand, if inflation is too low or negative (deflation), people delay spending because they expect prices to go down. This slows down demand and weakens the economy. Companies don’t earn enough and start cutting jobs or closing. That’s why stable inflation is better—it encourages healthy spending and saving at the same time.In the Philippines, the Bangko Sentral ng Pilipinas (BSP) sets a target inflation rate of 2–4%. This range helps maintain balance. For example, during the COVID-19 pandemic, when demand fell, BSP lowered interest rates to encourage more borrowing and spending. In 2022, when prices of oil and food rose fast, BSP increased rates to bring inflation back down.In short, low and stable inflation protects purchasing power, builds trust in the economy, and supports decisions that lead to more jobs, more production, and better lives for everyone.
