(U.S) What causes yearly inflation, and why can’t wages increase at the same rate?
In: Economics
Currency is just a representation of wealth to make it easier to trade. Wealth generally increase over time, more population, better technology increase efficiency and production, etc. There is a relation of supply and demand between the wealth which is the demand (because more wealth mean you want to trade more) and suppy which is currency (because you need currency to trade).
So if the wealth increase, but your currency don’t, you end up with deflation and it’s bad for the economy (more complex than that, but let’s keep it short). You can’t predict and add exactly the right amount of money to keep the currency equal to the wealht, that’s impossible. There is always variation, so instead we add a bit more money than wealth increase. This mean more supply than demand, which decrease the value of your currency and that’s inflation. We try to target 2% inflation, so that way the variation shouldn’t get us into deflation too much and it’s not high enough inflation to cause problems.
In addition, 2% inflation incentivize people to invest their money instead of keeping it for themselves and this mean that money circulation more into the economy, which is good for growing the economy. Those investment allow funds for companies to expand, build infrastructure, create more job, etc.
For the second part of your question, it should go up faster than inflation because wealth usually increase overtime. The problem is distribution of wealth and that’s a political issue.
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