I’ve read that many banks want a certain level of inflation and I don’t really see why. Why is important to banks that a stable product costs more tomorrow than today?
Is it to make people spend their money more since storing it will eventually make is worth less?
In: Economics
Mild inflation (5% or less) is relatively harmless because the vast majority of people spend the majority of their earnings relatively quickly. No one is buying groceries with the actual currency they earned in 1990. Younger people save some income and invest it. Over time the investments earn interest or increase in value because of inflation, productivity and earnings growth.
Mild inflation allows people to buy big, expensive things like houses with long term loans. Inflation makes it easier to make the payments over time. It also encourages people to buy things soon because they’re slowly getting more expensive.
Mild inflation: money is getting less valuable over the long term so you want to buy things that retain their value and/or grow over time
Deflation: money is getting more and more valuable so you want to hold on to it for as long as possible because the things you may want to buy are just getting cheaper (mostly because no one is buying stuff). Your pay is also subject to deflation along with the value of your home. Your loan balance will not change, though. This is not good
Hyperinflation: money is losing it’s value very rapidly so you want to get rid of it as soon as possible. You want to be paid every day and go to the market and buy what you need immediately because everything will be more expensive tomorrow. The problem is everyone else is doing the same thing. This is not good.
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