Why is inflation good for an economy?
In: Economics
I’m not sure that there is a consensus that it is, but in general, a low level of inflation becomes an incentive to spend and/or invest money, rather than simply sitting on it, since cash loses purchasing power over time when inflation is present. What most central banks want to avoid is *deflation*, since that increases the purchasing power of cash over time. And when people expect prices to be lower six months from now than they are today, they tend to put off purchases, and that increase to the savings rate can trigger a recession by itself. Note while it’s hard to see a reason why a high savings rate is bad for an individual or a family, when large numbers of people start saving their money, rather than spending, it can slow economic activity enough that it’s noticeable. (It’s called “The Paradox of Thrift.)
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