: 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

Deflation is really bad. Devastatingly awful bad.

If your target is 0% inflation, there still will be inflation in somethings. Healthcare and college for example have had higher than average inflation over the last few decades. To balance out to zero, this would mean everything else would have to be deflationary, which would be really bad.

Also, people’s wages tend to go up over time in rich countries. A taxi driver in New York City charges more than a taxi driver in Bangladesh, because the taxi driver in NYC could easily find a job in construction making more in a week than a worker in Bangladesh makes in months. Keeping inflation zero while wages go up would be super challenging and would hurt economic growth.