Eli5: Why can’t prices stay the same/inflation be 0%?
In: Economics
The government, fed, etc who is composed of the wealthy ruling class have an interest in devaluing the currency. It helps keep the wealth disparity growing; it causes the rich & poor gap to always get bigger. It discourages saving. You as an average person can’t hoard money as it will devalue. The rich ruling class on the other hand, dont have their money in cash. The rich invest in real assets, like companies, factories, realestate, mines, commodities, farms. These things just go up in value with inflation; so the rich controlling the prices & means of production are completely exempt & untouched from inflation. Inflation is great for the personal economies of the ruling class, & terrible for everyone else. It’s like movie “In Time”.
0% inflation is an unstable point. Like setting a ball on a sloping driveway, you can’t make it stay still there. It’s unstable for inflation because if there is no cost to invest money, then people with money have no incentive to spend or invest it because it will be worth just as much next month. As a result, they spend less and the economy slows.
1-2% inflation is like a little crest in the driveway. The ball can be rolled there and stopped there, but it won’t go there on it’s own.
The feds could manage the money supply to keep inflation at 0%, but most economist believe a small amount of inflation is better than zero. If at zero, you could comfortably sit on the money you have without engaging with the economy, but any positive inflation means that if you want to simply maintain your wealth, you have to put it to work to earn some sort of interest. Thus the notion that a small amount of inflation encourages investors to put their money back into the economy.
Assuming the population remained the same (balanced birth rate and death rate) and no innovations were made (machines that do work faster/cheaper than humans) and no natural disasters occurred (crop failures etc), then prices could be fixed and inflation be 0%.
That said, price fluctuations and inflation are influenced not just by raw economics, but also by government (and private) manipulation. Under capitalism (AKA greed, the opposite of altruism), some parties stand to benefit from inflation, so they will engage in behavior that encourages it — even at the expense of others. Inflation allows the rich to get richer and the poor to get poorer.
Prices change because value changes. As COVID sank in, lumber became very hard to get, and so its price shot up.
Inflation happens because the government wants it to – it encourages rich people to spend their money instead of sitting on it and works fairly well at doing that.
Governments control the monetary supply and try to maintain a slightly positive inflation rate.
You want money to devalue by 1-2% a year so that people and companies don’t just squat on it – they have to invest that money in tangible assets or businesses and keep the economy rolling.
If your money didn’t lose value – or worse, gains value – there’s an incentive to hoard it. Making sure money stays invested and not sitting in McDuck vaults is part of the central bank’s mandate.
It should be noted that- even if the money supply stays the same- prices will still change, because the supply and demand for goods and resources is always changing. Housing prices will go up if there are more people looking for houses and we’re not building enough new houses to keep up. Oil prices will go up and down based on seasonal demand, new oil reserves being found, and competing fuels/energy increasing.
It’s important to realize that all prices are the result of a long-term bidding process in the market, and there’s no objective basis that any of them are set by.
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