A few good comments and quite a few… not so good. A lot of explanations that focus on 2nd order, downstream effects and the machinations of economists and politicians. Price is one of myriad ways to measure the past & current state of the economy and to make guesses about its future.
“Inflation” is what we call it when it costs $1.00 to buy a dozen eggs last year and $1.10 to buy a dozen of the same eggs this year. "Deflation"is what we call it if the price goes down to $0.90 this year. Just to set some terminology.
No one person or group or policy or activity causes inflation or deflation. It’s just a measure of buying power.
But there is one key difference between inflation and deflation: the latter has a limit. Prices can go up forever, but they can only go down to $0.
So when all the people are trying to craft policies that influence the economy, they don’t want the economy to go in the direction of the brick wall of $0 prices.
It’s probably the case that inflation is the only thing that can happen and have a functioning economy over the long term. If that’s the case, then keeping it low is the best approach, which is why the American economic establishment has a target of 2% inflation.
It depends on how you define things on if it has a lower bound. If you’re talking percentage, it’s infinite. It’s Zeno’s Paradox. If you decrease by half, then decrease it again the second halving is less than the first, and this continues forever, never reaching zero. It approaches zero as we take the limit to infinity, but we can never reach infinity obviously, and yes, we could divide a penny if we need to. Since inflation and deflation work on percentages, not descrete values, deflation could never reach zero.
Inflation is a useful tool though. It makes it so spending money now is better than saving. Deflation makes saving money better, which slows the economy. Basically, things have to go very wrong to make deflation happen because tools will be used to prevent that.
I’m a little confused and not knowledgeable on this at all so I’m genuinely curious: if inflation goes crazy for years, like 8% for 4 years let’s say, why is there no concerted effort to drop it for a while, like -5% for 4 years, to “bring it back” to the 2% aimed for originally? If that makes sense. It seems like if inflation gets insane we’re all just stuck with it for the rest of time?
No expert, but another advantage of inflation is to create incentives to invest/spend money. With a deflation you are rewarding people that keep their money in a pillowcase. Which is probably bad.
Additionally there probably are some control structures to increase or decrease inflation, but they will bring their own cost with them. So controlling Inflation may be not controllable enough/not worth it to do so.
If prices go up, and stay up, eventually things like salaries have to go up too, at least a bit. If you need a certain amount per month to live when last year you could get by on less, you’ll need a job that pays you enough to live. In theory if the price of goods has gone up then the value of whatever you’re producing for your company has gone up so they can afford to give you the extra (in practice they take a lot of the extra as profit and pass on just enough to retain employees and no more). Of course, it’s the same physical item, so eventually it all sort of balanced out.
You can see this if you look at it in the long term. In 1970 the average salary in the UK was something like £1200 per year, and a house cost £4500 or something. Today the average UK salary is over £27,000 and a house is around £285,000. The houses haven’t got 61 times larger or anything, that’s just inflation. So, yeah, you kind of are just stuck with it.
Prices are always set by the market. How many widgets are available to buy vs how many people are willing to buy them.
In that context, the only way to reduce prices is to reduce willingness to buy, and we can only do that by reducing the money people have to buy things with.
This has a cumulative knock on effect. Less stuff being bought, less workers required to produce less stuff, people earning less money, less stuff being bought. This is called a recession, when the entire economy is shrinking.
Money is really just the lube that keeps the whole thing ticking. The important thing is that everyone is working and producing value. If everyone just stops working then we cant swap the things we produce for the things we want.
There are many reasons for inflation, but the biggest in Capitalistic economy is the interest and that there is no Gold the money is tied to. Basically, they can print out as many dollars as they want. There is no Gold standard.
I believe New Zealand was the first country to set the inflation target to 2%. So not sure what relevance the American inflation target has in this discussion. OP didn’t say they were from the US. America probably followed New Zealand’s lead.
A few good comments and quite a few… not so good. A lot of explanations that focus on 2nd order, downstream effects and the machinations of economists and politicians. Price is one of myriad ways to measure the past & current state of the economy and to make guesses about its future.
“Inflation” is what we call it when it costs $1.00 to buy a dozen eggs last year and $1.10 to buy a dozen of the same eggs this year. "Deflation"is what we call it if the price goes down to $0.90 this year. Just to set some terminology.
No one person or group or policy or activity causes inflation or deflation. It’s just a measure of buying power.
But there is one key difference between inflation and deflation: the latter has a limit. Prices can go up forever, but they can only go down to $0.
So when all the people are trying to craft policies that influence the economy, they don’t want the economy to go in the direction of the brick wall of $0 prices.
It’s probably the case that inflation is the only thing that can happen and have a functioning economy over the long term. If that’s the case, then keeping it low is the best approach, which is why the American economic establishment has a target of 2% inflation.
It depends on how you define things on if it has a lower bound. If you’re talking percentage, it’s infinite. It’s Zeno’s Paradox. If you decrease by half, then decrease it again the second halving is less than the first, and this continues forever, never reaching zero. It approaches zero as we take the limit to infinity, but we can never reach infinity obviously, and yes, we could divide a penny if we need to. Since inflation and deflation work on percentages, not descrete values, deflation could never reach zero.
Inflation is a useful tool though. It makes it so spending money now is better than saving. Deflation makes saving money better, which slows the economy. Basically, things have to go very wrong to make deflation happen because tools will be used to prevent that.
I’m a little confused and not knowledgeable on this at all so I’m genuinely curious: if inflation goes crazy for years, like 8% for 4 years let’s say, why is there no concerted effort to drop it for a while, like -5% for 4 years, to “bring it back” to the 2% aimed for originally? If that makes sense. It seems like if inflation gets insane we’re all just stuck with it for the rest of time?
No expert, but another advantage of inflation is to create incentives to invest/spend money. With a deflation you are rewarding people that keep their money in a pillowcase. Which is probably bad.
Additionally there probably are some control structures to increase or decrease inflation, but they will bring their own cost with them. So controlling Inflation may be not controllable enough/not worth it to do so.
Bitcoin is deflationary and why it has failed as an alternative currency. Nobody wants to spend it. HODL.
If prices go up, and stay up, eventually things like salaries have to go up too, at least a bit. If you need a certain amount per month to live when last year you could get by on less, you’ll need a job that pays you enough to live. In theory if the price of goods has gone up then the value of whatever you’re producing for your company has gone up so they can afford to give you the extra (in practice they take a lot of the extra as profit and pass on just enough to retain employees and no more). Of course, it’s the same physical item, so eventually it all sort of balanced out.
You can see this if you look at it in the long term. In 1970 the average salary in the UK was something like £1200 per year, and a house cost £4500 or something. Today the average UK salary is over £27,000 and a house is around £285,000. The houses haven’t got 61 times larger or anything, that’s just inflation. So, yeah, you kind of are just stuck with it.
Prices are always set by the market. How many widgets are available to buy vs how many people are willing to buy them.
In that context, the only way to reduce prices is to reduce willingness to buy, and we can only do that by reducing the money people have to buy things with.
This has a cumulative knock on effect. Less stuff being bought, less workers required to produce less stuff, people earning less money, less stuff being bought. This is called a recession, when the entire economy is shrinking.
Money is really just the lube that keeps the whole thing ticking. The important thing is that everyone is working and producing value. If everyone just stops working then we cant swap the things we produce for the things we want.
There are many reasons for inflation, but the biggest in Capitalistic economy is the interest and that there is no Gold the money is tied to. Basically, they can print out as many dollars as they want. There is no Gold standard.
I believe New Zealand was the first country to set the inflation target to 2%. So not sure what relevance the American inflation target has in this discussion. OP didn’t say they were from the US. America probably followed New Zealand’s lead.
Doesn’t matter, America is the only country 🇺🇲
US defaultism has made its way here from Reddit, I see.
I don’t think it’d a reddit thing, it’s an American thing.
They’ll still do it even when they’re in a minority.
The /c/news thing being US only really shits me though.