Can inflation actually be fixed? Is there any hope? Or will prices just gradually keep increasing?
In: 45
no because we kinda need prices to increase juuuuust a bit (like 2%) every year for the economy to actually work as intended. prices will always rise but as long as its between 0-2% every year youre fine
A small, predictable amount of inflation that does not outpace wages is considered healthy for the economy since it forces rich people to invest their money. That allows companies to find loans and investors. Without loans and investors, companies can’t really expand to produce the goods and services that people demand, which is bad for an economy.
If the amount of inflation is unpredictable, then it will cause prices to become unstable, which makes it difficult for companies to plan to buy and sell things (since many sales contracts are over a span of multiple years). If inflation is too high, then wages cannot keep up in the short term which is also bad. This is why countries typically target a small and predictable amount, like say 2%. It’s low enough for wages to keep up, and predictable enough that companies feel comfortable signing sales contracts for multiple years.
There are literally been decades in the past when prices dropped instead of rising. These are called slumps or depressions and are Not Good.
Inflation is bad if you’re on a fixed income. Depressions are bad for everyone who’s NOT on a fixed income.
Since it’s impossible for an economy to stay static, the usual goal for planners is for limited inflation to be the norm.
I think it’s important to recognize what exactly is trying to be fixed here.
Inflation is something the central banks can fix with the snap of a finger. All they have to do is increase the prime borrowing rates to double their current rates and you’ll see pretty rampant deflation.
But slight deflation is almost worse than high inflation. When you get deflation it means there is overall less money circulating around the economy. It means assets are worth less but it also means that less money is going to change hands because there’s less money to be spent.
In the case of Japan they had a “lost decade” caused by deflation. Japan was the centre of the world’s tech and because of this the world’s most powerful country. But they kept all of their secrets under lock and key and for the most part, they were the world’s largest producer of advanced semiconductors. But then the US promised trade action against Japan if it didn’t tell them their filthy little secrets. And as a result of this, China is the world’s largest producer of semiconductors. Japan’s economy deflated for a decade and they haven’t quite recovered yet.
So what the feds are trying to do is ease up the prime borrowing rate so as to not trigger deflation. They want inflation to continue to go up at a slower rate. Because you gain money you gain assets that will gain in value (with inflation). And they want it so that your life doesn’t change over your entire life, just one steady thing from beginning to end. It really sucks for people who aren’t accruing assets over their life though. But with the amount of inflation we have now, I had offers on my used car for more than what I paid for it 5 years ago.
Let’s call all the money paid in wages as “X”.
A percent of X is spent on good/services and a percent of X is saved.
Thus the amount of money paid in wages “X” actually decreases due to the amount saved.
This would be a shrinking economy. Not good.
While amazing complicated. In general, the loaning of money to banks, businesses, and people keeps X increasing (even w/ a percent being saved).
Lower interest rates cause more loans which increase X faster. Higher interest rates decrease loans which increases X slower.
If the amount of goods/services don’t increase proportionally w/ X you get inflation or deflation.
Inflation is necessary to constantly increase X.
This is why direct payments (stimulus) to people (across the world) w/ out people creating more goods/services led to horrible inflation we are experiencing now.
There was in increase in X.
There was a decrease in goods/services.
Both, on their own, cause inflation – together it was a double whammy.
In the US we have relied on low rates to increase X since Bush II.
To control the double whammy, we have raised interest rates to slow the increase in X.
Inflation cannot be “fixed”, that is why it is important to limit it. That is why there cannot be things like widespread stimulus checks like there was during covid.
You are getting lots of correct answers, so I’m not going to restate the 90% correct answer.
I want to add a little bit of nuance and some criticism of the confidence that everyone seems to have about inflation.
First of all all of the answers speaking as if this is a fact should all be prefaced with “according to economists” or “according to modern economics theory” or “my macroeconomics class taught me.”
Inflation (that is the cost of good and services relative to currency) does not happed across an economy uniformly. Inflation of higher education, housing and healthcare has been very high in the US for many years now. Inflation in regard to most people’s wages has been very low.
Ultimately, the hope is that wages inflate to match the new monetary costs of things, which in turn allows for things to “re-balance.”
On to a more skeptical take on “inflation”
What inflation does, in practical terms, is reduce the value of all of the money you have earned and save up to this point. In a way, it is “stealing” from actual, working-class people that are responsibly saving for a rainy day, in order to benefit the wealthy that can afford to effectively invest a large proportion of their wealth in investments that inflate faster than other things.
As a middle class person, I am at a huge disadvantage when investing to anyone with more money because I do not have the information, advisors or time to wisely invest. I am a lamb ready to be slaughtered by bigger players. This is the case with all small “investors” in most asset classes. By being forced to “invest” rather than “save” we, as the American public, are essentially supporting the lavish and wasteful lifestyles of the very wealthiest people in our society.
Others are saying we need inflation to grow the economy. I don’t believe this. Inflation has more or less became a never ending game of chicken. Let’s say we decided inflation is bad, and we attempted to keep it at 0% or lower. Money today would be worth the same 10 years from now. However all those other places in the world would still be having their money be worth less and less. This seems like a good thing, until you realize that after just so long out $10 would be worth a whole lot more for those outside than inside. Trading with other countries would become onesided. They will sell us goods, but wouldn’t buy anything. Why? Well while our $10 stayed the same for us, they see it as closet to $20 or possibly even more. There has been lots of times China jas intentionally inflated its currency because it was getting too high and causing other countries to limit trading.
Everyone is just stuck on the inflation bus for no good reason. The whole “it’s makes people spend instead of save” isn’t true, most people don’t save because they can’t. Look up the amount of inflation since the last time minimum wage was changes. That wage is less than half the buying power it was at the time.
if no one ever got a raise ever again in the entire world it might so I think no. Cost of living will keep rising as long as population keeps rising too.
It depends on what you mean by fixed. You ALWAYS want some inflation as it stimulates the economy.
Lowering it to normal historic levels if what you’re talking about. You do that by cooling down the economy. Remember people opposing the massive stimulus the the US did. Their rationale was both we have to pay it back and it will drive inflation into the sky. Sensible people didn’t listen though.
The easiest way to control the economy is via the Fed which determines interest rates in the country. Economy is overheating? Raise rates. Economy is going to recession. Lower them. Government spending and the money supply can be used to control things as well.
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