why is inflation a thing?

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why is inflation a thing?

In: Economics

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It encourages spending and a healthy economy. The money you currently have if you do nothing with it will slowly lose value so why would you just put it in your mattress? A healthy amount of inflation convinces people to buy goods or invest in things that will hold or gain value.

Inflation for the most part is generally an artificial construct. In very basic terms, for a currency (such as the US Dollar) that is not backed by precious metals (like gold) a very basic way of valuing currency is to take the all the finished goods and services made in a year and divide it by the number of dollar bills (either physical or digital) in circulation.

As technology increases we produce more and more goods for less and if we were to not print more dollars we would experience deflation, which means if you just hold on to your money, it’ll be able to purchase more stuff tomorrow than it could today. However because we control the money supply by the Federal Reserve we ensure that we print enough money so that we can hit a specific target (around 2%-3%) of inflation.

Is inflation bad? Nope! Inflation is basically what keeps an economy humming along nicely. It incentivizes people to buy things today rather than buying next year when it’ll most likely be cheaper. Money changing hands is how our economy stays strong, when people stop exchanging goods and services is when the economy stalls and goes into a downward spiral (2008 financial crisis). However there’s a limit to good inflation, once you start getting to even 5% you can do serious damage to people with little money. Then you have cases like Venezuela where inflation is so high that prices change literally daily, so the money you made today will only buy you 3/4ths of what it would have bought you yesterday.

Deflation is a real killer and will put economies in a spiral that can be hard to stop. If people just hold on to their money, then less goods need to be produced and thus less people need to be employed.

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