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
Money is designed to be circulated into the economy. You buy something and it pays the owner who pays staff, suppliers, utilities etc
If inflation is at 2%, it’s worth less tomorrow so it encourages people to spend but also save some
Saving in a regular account is good because it’s liquid and you can use it easily when you need to.
To beat inflation, you want to invest in things to bring you more return. This means more money is pumped into businesses to expand, create more jobs, who can spend money into the economy
A low rate also encourages businesses to borrow which boosts the economy for the above reasons
Now if it’s 0 or negative, it encourages people to do the opposite. Why spend today when it’s worth more tomorrow? If nobody is spending money, then businesses can’t afford to keep the lights on, which means people lose jobs. Industries lose investments, manufacturing declines etc
If it’s too high, people can’t afford non essential goods and investments. If the price of goods is high, people want higher wages which means the business cant afford to hire more people so they cut back
It also affects the international economy with imports and exports as it affects the prices other countries pay
It’s very complex and these examples are not guaranteed to occur, but it’s the general idea and known examples of what has happened
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