: Why is (consistent and steady) inflation considered to be a good thing? We hear about rising wages chasing the rising cost of living, and we do this calc every time we look at historical prices, so why is this better than static prices? Is it all driven by TVM?

Question

: Why is (consistent and steady) inflation considered to be a good thing? We hear about rising wages chasing the rising cost of living, and we do this calc every time we look at historical prices, so why is this better than static prices? Is it all driven by TVM?

In: Economics

Answer 1

Eli5 – because it makes people do something with their money rather than sit on it.    

If money was more valuable just by sitting in a bank account, people would do that and money wouldn’t flow.  Instead, it loses value by sitting.  So, to avoid that, people invest (in theory) which makes the economy grow (also in theory).   

  Eli 18 -The thought is that inflation is fine if the economy grows faster than inflation. Now, that theory assumes that everything in the economy would also grow to meet or exceed inflation, including wages.  Except since the late 70s, wages have not kept up.   

 This is great for companies since they adjust prices regularly to beat inflation.  If they don’t adjust salaries, they get an extra % to put in their pockets, which is what they did.  We are now approaching the stress point of those assumptions.    

One other wrinkle is that the assumption is a little stressed by the prevalence of whats called non-productive assets.  Things like real estate and stocks dont really create anything (at least for stocks after IPO anyway), compared to factories or machinery or businesses.  This confuses the issue and makes the “economy” look great, when its just money producing money and not (arguably) anything of real value. 

When money is producing money, this accelerates inflation and is destructive to markets because the money holders can flood out poorer market participants for goods and services.  This is why we are seeing a lot ofventures like Uber, who are not profitable and are losing money on pretty much every ride in exchange for starving out their competitors.   In a monetary battle of attrition, the poorer participant loses.  

Remember, though they changed the definition of inflation to refer to rising prices. Make no mistake, inflation is increase of the money supply.  Rising prices are a symptom.