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
Consider the alternate case: deflation (negative inflation). Money gains value automatically, just by sitting there. Thing is? This is a *guaranteed safe investment.* You haven’t given the money to anyone, not even a bank, so it’s not possible for you to lose the money unless it’s *stolen* from you. Hence, the best investment choice quickly becomes “never spend money.” That causes the economy to grind to a halt. This can become a self-fulfilling prophecy: people stop buying, causing demand to drop, which causes prices to drop to try to make SOME kind of sale, which means the currency has deflated even more, which means demand drops, which means… etc.
Of course, the reverse direction, excessive inflation or even hyperinflation, is also very bad. That ruins the value of the currency so quickly, economic activity ceases to be relevant, and folks revert to barter economy or find other mediums of exchange instead.
However, if you keep inflation very low *but not negative*, people have a reason to invest (their money will slowly lose value if they just sit on it) without being TOO badly punished by that incentive (the money only loses value very slowly). Suddenly, everyone is spurred to invest, to seek the best employment opportunities they can get, to spend what money they need to spend *now* and to look for better returns on what money they intend to hold onto.
That’s why *small* amounts of inflation are good. They create an incentive (invest so your money doesn’t dwindle) without creating a counter penalty (it’s realistically plausible for your money to grow fast enough to exceed inflation).
Edit: Also, debt becomes SIGNIFICANTLY worse under deflation. If you owe $1000, then that means the value of your debt goes up on its own, which is then compounded by interest. That’s very bad and can lead to many defaults and other issues.
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