: 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

Two reasons. First, the people who make monetary policy don’t just get to pick inflation. They “target” it, and sometimes that targeting doesn’t work. If target inflation is 0, then sometimes you get deflation, which can be quite damaging to the economy because it strongly discourages spending.

Second, a target of 0 inflation would require quite strict monetary policy. Fighting this recent bout of inflation has required restrictions that make it harder for people to borrow money -not just businesses and banks but also home buyers and other individual borrowers. Targeting zero inflation would crank this up even higher and make it permanent.