A few good comments and quite a few… not so good. A lot of explanations that focus on 2nd order, downstream effects and the machinations of economists and politicians. Price is one of myriad ways to measure the past & current state of the economy and to make guesses about its future.
“Inflation” is what we call it when it costs $1.00 to buy a dozen eggs last year and $1.10 to buy a dozen of the same eggs this year. "Deflation"is what we call it if the price goes down to $0.90 this year. Just to set some terminology.
No one person or group or policy or activity causes inflation or deflation. It’s just a measure of buying power.
But there is one key difference between inflation and deflation: the latter has a limit. Prices can go up forever, but they can only go down to $0.
So when all the people are trying to craft policies that influence the economy, they don’t want the economy to go in the direction of the brick wall of $0 prices.
It’s probably the case that inflation is the only thing that can happen and have a functioning economy over the long term. If that’s the case, then keeping it low is the best approach, which is why the American economic establishment has a target of 2% inflation.
I’m a little confused and not knowledgeable on this at all so I’m genuinely curious: if inflation goes crazy for years, like 8% for 4 years let’s say, why is there no concerted effort to drop it for a while, like -5% for 4 years, to “bring it back” to the 2% aimed for originally? If that makes sense. It seems like if inflation gets insane we’re all just stuck with it for the rest of time?
No expert, but another advantage of inflation is to create incentives to invest/spend money. With a deflation you are rewarding people that keep their money in a pillowcase. Which is probably bad.
Additionally there probably are some control structures to increase or decrease inflation, but they will bring their own cost with them. So controlling Inflation may be not controllable enough/not worth it to do so.
Inflation occurs when the value of goods increase. This can mainly be caused by two things: An increase in consumption or an increase of production costs, which causes the vendor to increase prices in order to maintain profits.
Deflation would occur when the opposite happens, aka when the value of goods decrease. This can be caused by things such as new technological improvements (old hardware has become cheaper, because new hardware has been released and the older hardware is no longer state-of-the-art), a reduction in consumption or a reduction in production costs. Perhaps I’ve missed a few cases, but these are the main things I can currently think of.
Anyway, while deflation is generally useful for consumers (they have to pay less), it’s not very good for borrowers. Let’s take a mortgage for a house, for example. You want to buy a house for €200k and have a mortgage of €200k that will cover the house. If something bad happens to you financially (for example, you lose your job), you may end up in a situation where you’ll no longer be able to pay off your mortgage. Shit happens right? Usually, the bank would take control of your house, sell your house for €200k and use the revenue from the house to pay off your mortgage.
However, if deflation has occurred and your house is no longer worth €200k, but €150k, you still have €50k to pay off to your bank, after the bank has sold your house. Simultaneously, you’re unemployed, so how are you going to do that? If you declare bankruptcy, you will no longer have to pay off your debts and the bank has lost €50k.
Besides this, deflation can also be a symptom of something worse happening, such as high unemployment rates and a decrease in consumption, for example. When more people get unemployed, people will spend less, which reduces demand, which leads to a decrease of prices.
This can mainly be caused by two things:
You forgot expansion of the money supply.
Tell me: if the Fed prints a one quadrillion dollar bill but looks it into a safe so that nobody can ever use it. How much inflation do we get?
How much does the money supply go up by? It can’t really count as supplied if it’s locked in a safe.
Aha. So the sheer amount of money is not important?
Just, as if the circulation speed is the crucial point. Damn. Good for you for noticing.
The value of things doesn’t really increase. One loaf of bread still makes my hunger go away the same amount that it does regardless of its price tag.
It’s the »measurement tool« that we are measuring/defining its value with that’s changing in alignment to the amount of supply of bread.
Because our monetary supply is controlled by an entity that can print new money but doesn’t have any good way to take money out of circulation.
Yes? Everytime a loan is payed back the money supply decreases.
