(I’m American) Inflation is the rising cost of goods and services. Inflation constantly goes up by varying degrees. When economists say “inflation is decreasing”, that just means that the rate of inflation has slowed, not that inflation reversed.
If inflation is causing money to be less valuable over time, why would it be bad to have deflation? Would that not make my money more valuable? I’ve been told it would be very bad, but not in a way that I understand
In: Economics
The key that most people miss about deflation is that economists aren’t particularly worried about it discouraging consumption. Deflation discourages investment.
Lets say you’ve got enough money to build a factory. You expect that factory to grow your wealth by 2% a year. Well if deflation is at 5% a year, you expect to make more money stuffing that money under your mattress and sitting on it. So you don’t build the factory. Nothing gets made at the factory. No one gets employed at your factory. Businesses around the factory don’t get a bump in customers from the employees at the factory.
On the other hand, if inflation is 5%, you would absolutely build that factory. You expect your wealth to drop by 5% a year if you sit on it. With that much deflation you’d even build the factory if you expect it to lose a bit of wealth. After all even if the factory is going to lose 2% a year, that’s still better than holding cash.
That lack of investment caused by deflation is horrible for the economy, particularly in the long term.
Now the other hand, if inflation gets too high, it causes some pretty serious problems for consumers. But economists have figured out that a low amount of inflation (around 2% per year) has little to no impact on consumers, while also working to prevent deflation.
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