What’s the benefit of slow but steady inflation? For instance, the dollar has steadily been declining in value for many decades.Decades from now, would the average car cost $80,000, a gallon of milk cost $12, and the average worker's income be $68,000 a year?Why not restrict a currency to as little inflation as possible? What purpose does inflation serve - or what harm is there in keeping the same value (not necessarily deflation, but holding steady?). Created by Red Fox Ace. social-science-en - economics-en

What’s the benefit of slow but steady inflation?

May 2021 5 130 Report

What’s the benefit of slow but steady inflation?

What’s the benefit of slow but steady inflation? For instance, the dollar has steadily been declining in value for many decades.

Decades from now, would the average car cost $80,000, a gallon of milk cost $12, and the average worker's income be $68,000 a year?

Why not restrict a currency to as little inflation as possible? What purpose does inflation serve - or what harm is there in keeping the same value (not necessarily deflation, but holding steady?)

Social Science / Economics

ekonomix

Verified answer

Inflation and exchange rate are different althugh they are linked.

There are 2 types of inflation. COst push inflation is said to occur when due to increases in costs (say of fuel) costs of production go up, causing suppliers to ask for higher prices at all levels of output to cover costs. Demand Pull inflation is said to occur when demand increases, causing suppliers to pay workers more to work more to meet demand since we are near full employment (as opposed to just dipping into unemployment pool that leaves wages virtually unchanged).

When people talk about the benefits of steady but low inflation they are thinking of demand pull. As demand rises, near full employment, wages rise, people feel richer, demand rises... a nice virtuous cycle.

Inflation and exchange rates are linked.

Say a currency depreciates, imports are more expensive to locals and exports cheaper to foreigners; this tends to decrease imports and increase exports, increasing GNP.

However, if the imports are not replaceable, then the cost of living goes up and inflation occurs. However, in the case of the US, there are substitutes to imports, and furthermore, many soruces of imports. Hence depreciation is unlikely to cause inflation.

There is another link. If people believe the econom will slowly but steadily grow, then they will know the currency will be stable and even appreciate slowly over time, and generate good returns (no need to cut interest rates to stimulate an economy that's already doing well, so steady or rising interest rates). There will be high demand for the currency and it will remain steady or slowly appreciate.

The key here is to differentiate the causes and the signals. Demand pull inflation is caused by an economy doing well, operating at near full employment, and in a virutous cycle. This also causes steady demadn for the currency and stable or even appreciating currency.

Hence slow and steady inflation is a good thing in as much as it signals a healthy ecoomy.

catharsis

The benefit is to the government only. All other participants in the economy (of any country) suffer the slow but steady loss of wealth in all of its forms.

The only solution that I can offer would be a Constitutional Amendment.

"The rate of inflation shall never be allowed to rise above the prime interest rate."

The prime rate is the rate at which banks lend money to each other, and so affects the interest rates at which We The People can borrow money.

When the rate of inflation is higher than the rate of interest, we lose wealth in all it's forms.

Wealth here means "value", not hordes of cash. Wealth is the value of the cars we drive, the homes we own, and our savings accounts, as well as the paychecks that we get.

Anonymous

Low inflation is the target of the central banks around the world. It has to be kept lower than 2%. You're right. Slow and steady in flation is the wish. But to achieve this goal, it needs austerity, discipline and commitment.

SDD

Economically, inflation serves no purpose. Politically, it serves a number of purposes. The one most important to government is that because income tax rates are progressive, politicians can give themselves more revenue to spend every year without having to actually vote to raise taxes. Corporate employers have a similar motive. They can appear to be giving raises to everyone without actually having any real cost to them.