THE FINANCIAL PAGE
People really, really hate inflation. In polls, voters regularly cite high prices, as one of their biggest concerns, even when inflation is low. A 2001 study that looked at the “macroeconomics of happiness” found that higher inflation put a severe dent in how happy people reported themselves to be. The istaste for inflation is such that a 1996 study (titled, aptly, ‘Why Do People Dislike Inflation?”), by the Yale economist Robert Shiller, found that, in countries around the world, sizable majorities said that they would prefer low inflation and high unemployment to high inflation and low unemployment, even if that meant that millions of extra people would go without work.
Weimar-style hyperinflation is, of course, an awful thing. But people loathe inflation even in moderate doses, where the evidence suggests it does little damage. The best estimates of the cost of inflation find that even a ten-per-cent inflation rate – much higher than anyone is currently pushing for – shrinks consumption by just 0.1 to 0.8 per cent. There are other costs, to be sure: inflation shrinks the value of people’s savings, and uncertainty about future prices makes business decisions less efficient. There’s also the risk of inflation getting out of control. But the historical record suggests that the risk of three-percent inflation turning into hyperinflation is very small.
Which of the following is probably the main reason that the author mentions a “ten-per-cent inflation rate” in paragraph 2?
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