If Governments use FIAT currency, why do we have inflation?
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Do you mean “why do we have inflation in general?” or “why do we have higher inflation right now?”
The main reasons why inflation is the norm come up pretty often on this sub. It’s not an accident that we generally have inflation, governments actually *aim* for a low level of inflation.
Here’s a list of the general reasons for inflation:
* It provides a buffer to help prevent deflation. Deflation is considered worse for the economy and harder to control.
* It encourages people and businesses to invest money productively rather than letting it “sit idle”. This helps increase productivity and grow the economy.
* Long-term public (and private) debt assumes some level inflation. This could be changed over the long-term, but if inflation suddenly stopped, debt would become much more expensive for governments (and many individuals and organisations).
* Governments benefit from “fiscal drag”. This means that things like tax brackets, benefits, etc. tend to lag behind inflation. So, for example, over the course of a year people get higher wage increases to cover inflation, but the government doesn’t increase tax brackets for another year. That means more people will be in higher brackets and the government gets more tax. (Of course, if it weren’t for fiscal drag, governments would just have to increase tax rates or spend less, but this can be a way of taxing more without *looking* like they’re taxing more.)
* There is often a temptation for governments to increase the money supply for short-term benefits. This is controlled to varying degrees in different countries by things like political culture and independent central banks. In general, though, governments ‘mistakes’ are more likely to increase inflation than decrease it.
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