If the ideal inflation rate is around 2%, won’t money eventually become worthless?
In: Economics
So many bad and wrong answers here.
No, Money won’t become worthless, because money is relative.
With a low to interest rate, the prices of everything will rise by a similar amount. For example lets say you make 1000 dollars a month and your rent is 200 dollars a month. Now lets say over the next 20 years inflection is 100%. After those twenty years, you make $2000 a month and your rent is $400 a month. Its still a 1/5 ration. So your money didn’t lose value, because your labor is still worth the same amount when compared to rent.
Low to moderate inflation is not a problem if its balanced and fairly predictable.
A lot of the things that people blame on inflation are really the result of pay inequity. Where the incomes of the wealthy are going significantly, but the income growth at the bottom of the scale is growing slowly and possibly below the inflation rate.
This leads some people to think that if we could keep inflation at zero then everything would be fine, but it actually causes more problems. Trying to keep inflation at zero you run the risk of getting into Deflation which is much worse than inflation and really tough to get out of.
With deflation your money is worth more tomorrow than it is today, so people are encouraged not to spend because things will be cheaper tomorrow. If people don’t spend then they are not buying goods and services, which means people will make less money and slow the economy. It creates a cycle that’s very hard to break. Japan was in a recession for over a decade because they got into a deflation cycle.
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