: 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
A stable low level of inflation is a good thing because deflation is disastrous.
Deflation = an overall decrease in prices. If consumers expect that prices will continue to fall, then they prefer to save to buy goods and services later when they are cheaper. This decreases demand.
As demand decreases, producers are unable to sell as much and therefore reduce supply, reducing their need for factors of production, such as labor, increasing unemployment.
As unemployment increases, consumers’ income decreases, further driving down demand (and prices), perpetuating a deflationary spiral.
Deflationary spirals have been attributed to significant economic events in the past, such as bank runs and the Great Depression, which is why it’s preferential to have low levels of inflation and prevent deflation.
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