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
First, inflation is a dynamic outcome of economies. Thinking of inflation as simply “price increases” is not quite accurate. Aggregate price changes are the result of saving, spending and investing decisions of all the players in the economy. It isn’t a tank you fill once and let it remain stable. Instead it is producers constantly building new things, finding new ways to make things (better?) through investment and changing consumer demand – ie it is like a tank with lots of inflows and outflows.
What economic planners want to avoid is deflation which is generally a lot more destructive to economies. Generally speaking, this leads to a reduction in productive output of a society, and this generally builds on itself in a runaway spiral. The worst case outcome is stagflation where there is a combination of both rising prices and reduced output.
There is also a need to accommodate new consumers (population increases), workers as well as incentivize investment. These tend to work better in an environment with low inflation. Central banks therefore typically target something like a 2% inflation rate assuming that the actual rate will be somewhere close to that. Targeting 0% inflation means a high risk of deflation (ie negative inflation) if targets are missed.
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