It might be hard to imagine, but inflation can have positive impacts on economies. The rising prices decrease demand, while it makes future outlooks uncertain. Reaching stable prices is in everybody’s interest. Despite the terrible situation, inflation might help to save the Hungarian economy if economic theory comes into play.
As prices skyrocket, wages cannot keep up with the demand. The Eurozone has not experienced such a crisis in its short history. In some member states, we can even see forty-year records being broken. While in Hungary, inflation is well above 20 percent now. Although wage raises reach unprecedented levels, they cannot keep up with the inflation rates. This, combined with the rising operating costs, makes the whole situation even worse.
The positive side of inflation
From the article of Portfolio.hu, it turns out that inflation can also decrease the national debt. On the one hand, the rising prices increase tax revenues. On the other hand, inflation brakes the balance in the debt-to-GDP ratio. The first aspect is quite easy to understand, but it is the smaller part of the equation. As prices rise, so do the taxes included in the price. So, if prices grow by 20 percent, the tax revenues on the sold products also grow by 20 percent.
Debt-to-GDP ratio is a bit harder to understand. To avoid growing national debt, the economy of a country has to grow more than its national debt does. This makes sense so far, as the economy is able to generate enough coverage to pay for its debt, decreasing national debt over time. This was the trend in most European countries before the Covid pandemic.
When examining economic development, usually real growth is considered as the basis. Meaning that during analysis, what matters is the quantity of the produced goods, not their price. During high inflation, real GDP growth can slow down or even reverse. Despite the decreasing real GDP growth, nominal GDP growth can still increase, as inflation can inflate the size of economies too. If the deficit remains and the nominal GDP growth happens, the debt-to-GDP ratio will decrease. Basically, the economy inflates to the point where the stagnating deficit takes up a smaller percentage of the annual GDP.
Is this good news?
Debt-to-GDP ratios will fall over Europe in the near future, especially in indebted countries such as Hungary. However, it must be noted that there are a lot of variables that can change the outcome of the hypothesis. The high inflation period can help countries reduce some of their national debt that had soared during the Covid pandemic. Despite the small relief, the negative aspects heavily outweigh the positive aspects of the rising prices.