In more technical terms, inflation is a market pathology, a market failure. Inflation disguises bad economic performance of firms and of the economy as a whole. Paper profits make up for operational losses. The incentives to innovate, modernize, and enhance productivity suffer. Economic yardsticks and benchmarks get distorted and do not allow for meaningful analysis of the performance of the economy.
Inflation leads to technological and economic stagnation.
Plants do not modernize, the financial aspects of the firm s operations are emphasized, the industrial and operational aspects de-emphasized and neglected. Economies are seized by the pathological economic condition known as stagflation zero or negative growth, coupled with inflation. A sense of urgency and crisis sets in and clears the path towards the next, second phase. In an effort to overcome the pernicious effects of inflation, governments liberalize, deregulate and open their economies to competition. Firms innovate and streamline.