Does UBI cause inflation?

Daniel Michael Hurt

March 30, 2023

Daniel Michael Hurt

The question of whether or not UBI causes inflation is an important one. Some argue that UBI would be an inducer of inflation because it essentially transfers wealth from those with higher incomes to those with lower ones.

While this is a valid concern, there are other ways to combat the problem of rampant inflation. Providing an account at a central bank could help control it.

Deflation

Deflation is a general decline in the price of goods and services. This usually occurs when demand for goods and services falls, which causes companies to reduce their prices.

Alternatively, deflation can also be caused by technological advances and increased productivity. These developments enable firms to produce more goods for less money, thus reducing their production costs and the amount of money needed to purchase them.

The lower the cost of production, the greater the incentive for firms to cut prices to attract consumers to buy their products. This leads to a downward chain reaction that affects production, wages, and consumer spending.

Generally speaking, deflation is associated with higher unemployment and reduced economic growth rates. It is considered a negative factor in the economy because it can cause a recession and make it difficult to overcome economic challenges. However, there is a type of deflation called the “good” type, which can result from rapid productivity improvements that lead to increased profits and real wages.

Hyperinflation

While inflation is generally considered a healthy sign of a strong economy, there are some occasions when it can get out of hand. This is called hyperinflation and is a severe form of inflation that causes prices to skyrocket.

Inflation occurs when a government increases the amount of money in circulation, usually through printing money to fund expenditures or loans. Typically, this is done in response to a recession or depression to boost the economy and encourage consumers and businesses to borrow and spend.

This type of inflation can be caused by many factors, but two of the most common are an increase in the money supply and demand-pull inflation. The former happens when a country’s government starts printing money to pay for its spending, as happened in Nigeria in the past week.

The second is demand-pull inflation, which occurs when a country cannot produce enough goods and services to meet consumer demand. This results in higher prices for all goods and services in the country. The most well-known example of this is the Weimar Republic in Germany in the 1920s. This occurred due to World War I and its aftermath.

Devaluation

The devaluation of a country’s currency by a government can be done to stimulate exports and reduce the cost of debt. However, it can cause tensions in the international market and foster global uncertainty.

This may lead to a rise in interest rates and inflation. It also has the potential to scare away investors and lower a country’s value in the eyes of its creditors.

It can also increase import prices, making goods more expensive for foreign buyers. This can hurt the domestic economy as it will decrease demand for imported products.

The government can choose to devalue a country’s currency for any number of reasons, but it should be carefully planned. If it isn’t handled correctly, devaluation could lead to hyperinflation.

Easing of the National Debt

Many economists believe that inflation is the natural result of an economy with a high amount of debt. They also assume that the Federal Reserve can and will raise interest rates quickly should inflation occur.

The truth, however, is that there are other factors at play when it comes to the relationship between debt and inflation.

To some extent, inflation and deflation are influenced by expectations of future surpluses and deficits, which in turn are influenced by changes in interest rates.

When the government sells bonds to soak up excess dollars, it can cause a change in these expectations and a rise in the prices of those bonds. That increases the cost of financing the government’s debt, which in turn adds to current inflation and can increase long-term deficits.