Managing Director of Fortress Financial Investments Hamed Mokhtar Comments on How Excessive Inflation Damages Economic Recovery
DUBAI, United Arab Emirates - Wednesday, July 10th 2013 [ME NewsWire]
(BUSINESS WIRE)-- Hamed Mokhtar, Managing Director of Fortress Investments, recently gave a talk on uncontrolled inflation to investors, in which he outlined the dangers it poses to economic recovery. Inflation, which can broadly be defined as an increase in prices, impacts the cost of living, cost of doing business, bond yields and the cost of borrowing money. It is detrimental to economic recovery because as the cost of goods rise, savings are eroded and buying power is decreased, if it is left unchecked and rises too quickly. If inflation becomes too high the economy can suffer; conversely, if inflation is controlled and at reasonable levels, the economy may prosper. With controlled, lower inflation, employment increases, consumers have more money to buy goods and services, and the economy benefits and grows.
"There are three causes of inflation”, says Mr. Hamed Mokhtar. "The first cause is called demand-pull inflation. This occurs when demand for a good or service rises, but supply stays the same. Buyers become willing to pay more to satisfy their demand. Demand-pull inflation can be accompanied by irrational exuberance. The second cause is cost-push inflation. It starts when the supply of goods or services is restricted for some reason, while demand stays the same. When the supply of labor is not enough to meet demand, it can create wage inflation. In the past, inflation in prices generally led to wage inflation, so that companies could retain good workers. However, competition from technological alternatives (such as robotics) and lower-income countries means that wages haven't kept up with prices. Higher prices combined with stagnant wages means your standard of living has decreased. It's another reason for income inequality in the U.S. The third cause is overexpansion of the money supply. That's when a glut of capital in the market chases too few opportunities. It's often a result of expansive fiscal or monetary policy, creating too much liquidity in the form of dollars or credit.”
"A low inflation rate is beneficial to a country”, says Hamed Mokhtar, "while a high inflation rate is very harmful to an economy”. A high inflation distorts consumer behavior. Because of the fear of price increases, people tend to purchase their requirements in advance as much as possible, which can destabilize markets creating unnecessary shortages. High inflation also redistributes the income of people. Fixed income earners – such as pensioners - and those lacking bargaining power will become relatively worse off as their purchasing power falls. Trade unions may demand for higher wages at times of high inflation. If the claims are accepted by the employers, it may give rise to a wage-price spiral which may aggravate the inflation problem. During a high inflation period, wide fluctuations in the inflation rate make it difficult for business organizations to predict the future and accurately calculate prices and returns from investments, which undermine business confidence. When inflation in a country is more than that in a competitive country, the exports from former country will be less attractive compared to the other country. This means there will be less sales for that country’s goods both at home and abroad and that will create a larger trade deficit. At the same time, high inflation in a country weakens its competitive position in the international market.
The third cause of inflation – overexpansion of the money supply – is the most relevant to the recent financial crisis in the US, as many feared that massive amounts of quantitative easing would lead to soaring inflation rates, which would damage the US economic recovery. These fears proved to be unfounded and inflation rates have remained at or below 2.0% for the past five years. Even as US consumer prices recorded their largest increase in four year last month – a jump of 0.7% - gasoline alone accounted for over three-quarters of this increase. In short, the hyperinflation that many feared would materialize never did.
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