Is inflation inevitable in all successful economies? Throughout history, has there ever been a society that maintained 0% inflation for a long term while still maintaining a good quality of life?

Question

Is inflation inevitable in all successful economies? Throughout history, has there ever been a society that maintained 0% inflation for a long term while still maintaining a good quality of life?

In: 5

Answer 1

To answer that question you need to understand what inflation is exactly. Currency and Wealth are two different things. Wealth is stuff of value for human, either a product, a natural resource or a service. Currency is just something that help trade wealth. There is a relationship of supply and demand between the two.

The supply is the currency and the demand is the wealth, because the more wealth you have the more you want to trade it with others. In general, wealth increase over time. The population increase so more worker, the technology and education increase so we are more productive, etc.

So this mean that if demand (wealth) increase, but the supply (currency) stay the same, then the value of the currency will increase, which would be deflation. But if we add currency to the economy faster than the wealth increase, then we get more supply than demand, which lead to a decrease in the value of the supply (currency), we call that inflation.

So as a country you can decide how much currency you want to add to the economy to control like a valve how much deflation or inflation you want. But unlike a valve, this is a very complex and dynamic problem. You can try to estimate how much wealth will increase, but you will never estimate exactly. You also can’t simply add an exact amount of currency in the economy, you need to add it indirectly (too complicated to explain here).

So even if you wanted to stay at 0% inflation, that would just be impossible. So usually countries try to target about 2% inflation. That way with natural variation you should vary between 0 and 4% inflation, which are all relatively healthy level of inflation. You don’t want to go into deflation long term or too high of an inflation.

The other advantage of targeting 2% is that a little bit of inflation is actually good. It incentivize people to invest their money instead of keeping it. Money invested is money that do work and that’s good for economic growth.

So no it would be physically impossible to keep your inflation at 0%, but even if it was possible that wouldn’t be good for economic growth.