Negative effects of inflationary growth on the economy

Of course, just as how there are two sides to every coin, similarly, there are pros and cons to inflationary growth as well. Although inflationary growth and inflation does have their fair share of benefits, there are also many things that they bring about that can instead be harmful to both the economy and the country.

Firstly, uncertainty. Uncertainty in the future can lead to a decrease in aggregate demand and hence a decrease in investment. As people are unsure about the future, they tend to save more and spend less, leading to decreased demand.  A recent survey by AVIVA showed that 30% of Singaporeans were less willing to spend during times of inflationary growth.

 If inflation is rapid enough, in fear of unaffordable prices, there may even be shortages and goods being hoarded. For instance, in 2008, after Johor stopped Singaporeans from buying cooking oil from Malaysia, there was a shortage of cooking oil in Singapore as thousands of Singaporeans scrambled to buy and stock up on cooking oil in anticipation of price hikes.

Similarly, aside from causing a decrease in purchasing power per unit of currency, increased inflation can also result in increasing costs of production and a further decrease in aggregate demand. All of this leads to an even higher cost of investment for firms which worsens the problem of high inflation rates.

Furthermore, in the Singaporean context, with continued growth in inflation and no growth for wages in the middle income groups over a sustained period of time, inflation can even result in the widening of the social and income gap between different classes of Singaporeans. This issue is worsened by the increased demand and hence increase prices of housing in Singapore. In a survey by the Straits Times, Singaporeans have also been shown to be most concerned about both inflation and housing prices as well.

Positive Effects of Inflationary Growth on Consumers

Contrary to popular belief, inflation isn't necessarily bad for the economy as a whole. Inflation can bring about further economic growth as well. 

Firstly, while an uncontrolled rate of inflation is indeed harmful for the economy, a moderate amount of inflation over time is in fact an indicator of a healthy economy and shows that there is still a degree of economic growth. This encourages investment in non-monetary capital projects as a trend of economic growth helps boost people's outlook on future economic trends and give them confidence.

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Furthermore, in contrast to deflation, a process which discourages consumer spending and hence lower economic growth and possible leading to stagflation, it is better to have moderate amounts of inflation to encourage foreign investment as well as encourage people to spend. This is much more crucial for a country like Singapore, which is highly susceptible to the changes in the global economy. By spending more and obtaining more investment, there is more income flowing in the economy according to Keynes's theory of circular flow, creating a positive cycle where the more income flows into the economy, the more the economy grows and the more income increases.

As a whole, a moderate amount of inflation helps stimulate economic growth as it bolsters and boosts both consumers' and investors' confidence. People are often affected by their expectations in decision making. In anticipating a future recession, people may choose to save up money and reduce spending in order to be able to cope with the recession. Similarly, when anticipating sustained economic growth, people tend to spend more as a result, resulting in an increased rate of economic growth.

Types of Inflation

According to new Keynesian macroeconomic (economics to do with behaviour of economy) theory, there are 3 forms of inflation which form up the 'triangle model': 'demand-pull inflation', 'cost-push inflation', and 'built-in inflation'. These forms of inflation hence constitute the causes of inflation according to Keynesian theory. 

Demand-pull Inflation

Demand-pull inflation refers to inflation due to excessive aggregate demand or total expenditure in an economy. This can be due to many reasons, such as increased consumer outlook. When the economy seems set to improve, people tend to spend more. 

Cost-push inflation

Cost-push inflation refers to inflation due to increased business costs, which may include higher import, export and investment costs, among others. Similarly, this is the most common cause for inflation in Singapore due to our country being land-scarce and our nature as a trading hub, most of our goods and materials are imported from abroad. As such, due to most of our goods used for production and consumption being imported from abroad, rising import costs often causes Singapore to experience increased inflation.

Built-in Inflation

Although not as relevant in Singapore today, built-in inflation was a common reason for inflation in the past. Due to the price spiral, caused by everyone attempting to keep up with inflation, firms pass off higher labour costs to consumers as higher prices, leading to a vicious circle of ever-increasing inflation.

Now that we've understood the three basic types of inflation that form the Triangle Model, let us examine the effects that inflation plays on a country like Singapore, and why.

Introduction: What is Inflation and Inflationary Growth? 

Hello, our dear Singaporean friends! Welcome to this simple crash-course of inflationary growth , run by the Association of Sensible Singaporean Economists. We hope that through this simple-to-read website, you can learn more about inflationary growth and how it affects you.

You often hear about inflation in the newspapers and on TV, but do you know what inflation means? To begin with, Inflation is generally defined as a sustained rise in general price levels of prices and goods and services in an economy over a period of time. Inflation also often means a decrease in the purchasing power of a country's currency, since the amount of things each unit of currency, in our case, Singaporean dollars, can buy will decrease as a result of inflation. One example of how the Singaporean government had helped eased the problem of inflation was through easing their monetary policy and allowing the Singaporean dollar to rise. Indeed, proper knowledge of the phenomenon of inflation and how to counter it is a valuable asset in today's society. 

With that being said, what then, is inflationary growth? Inflationary growth would then refer to growth from any economic activity that leads to inflation, or when actual growth far exceeds that of potential growth. 


Sensible, isn't it? But that's what we're known for. Being sensible economists. We truly hope that by the end of these posts, we'll be able to help you better make sense of the concept of inflation and inflationary growth.