Government and economists say, that ideal inflation is about 2%.. why is that? Why is 2% of my savings disappearing every year good? (In ideal case)
In: Economics
Inflation is caused by too many buyers chasing after too little goods, indicating that our economy is not producing enough goods to keep up with demand.
Deflation is caused by too many goods with not enough buyers, indicating that our economy has outpaced demand. Shrinking demand indicates the country is in decline as people are unable to afford new goods.
Too much of either is a very bad thing. In an ideal economy, demand for goods just slightly outpaces production, causing business owners and investors to put money into the business to grow to meet demand. Causing a steady increase over time. If this difference is small enough, say 2%, wages, employment, demand and production are all able to keep up with each other (mostly). When the gap becomes too large, we run into situations like we are in now, where price hikes are massive, so wage hikes have to be massive to keep up.
Think of it like a wrecking ball on the end of a crane. If the ball swings in tiny little motions (small inflation), the building doesn’t take much damage. The further back the ball swings, the more damage is inflicted (increasingly larger inflation).
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