Asklemmy

Central banks have a target inflation of about 2% and actively try to prevent deflation (much more so than inflation). In general moderate inflation is a good thing as it puts some pressure on keeping the money in circulation instead of hording it.

This is because inflation isn't a bug it's a feature.

Anything that transfers wealth up the chain, from working class to middle class and from middle class to upper class, is a feature of the western economic system.

For example, in England and Wales the Bank of England is charged with keeping inflation at a target of around two per cent. This means that the pound in a workers pocket is supposed to devalue. The advantage is that the government borrows money in its own currency so inflation means that its debt goes down (in real terms) when inflation goes up.

Because once a corporation increases prices due to "supply and demand" or whatever bullshit reason they make up that week, those prices never go back down if the reason changes. conveniently.

Every corporation will say "we need to increase the price on "x" because the primary supplier in Bolivia is facing economic turmoil...blah blah blah." But once that turmoil is over and supply returns to normal, they don't bother taking the prices back down and rely on the fact that modern society is too distracted by their "conveniences" to care.

"The people will not revolt. They will not look up from their screens." -- a stage play based on George Orwell's 1984

They (the super-rich) have created a class of people beneath them who don't notice or care that they're being fucked over so long as they are provided with more and more vapid content to consume.

Everyone seems to be missing the most dangerous part of deflation: If prices fall year over year, collateralize credit becomes incredibly unstable. If you borrow a million dollars from the bank to build a house and then in five years that house is worth half a million...well you would be stupid not to walk away for your loan and leave the bank with a half million dollar hole in its balance sheet. If the whole market does this consistently year after year then banking becomes impossible and the whole system collapses. Weve had this happen before, such as during the Great Depression and very briefly during other market crashes like in 2008. If a central bank has to choose between inflation and deflation, they will choose inflation every time.

All fiat currencies are designed to prevent hyperinflation and deflation.

Why is deflation bad for an economy? It encourages prior to hold off on spending money as money tomorrow is worth more than money today. It also means people are less likely to invest money, as you can get better returns by saving your money under your mattress.

Actually, inflation by itself is a natural phenomenon,
associated to the growth of the population. Deflationary trends are actually symptoms of something far worse happening.

In order for inflation not to exist, growth and access to natural resources should match the growth of populations.

In a Utopian society, a la Engels, the growth and access to those natural resources would be controlled to match the growth and access needs of the population, thus helping humanity not to experience inflation. But of course, that also denies humanity, and humanity’s ambitious nature.

In reality, the growth and access to those resources is controlled for many reasons, which in many cases, have nothing to do with ambition. For example the geographical access to certain commodities can be used to barter for resources or commodities inaccessible in that community.

And of course, there’s ambition and the discovery that owning a resource gives us the power to demand more for it, and not only have a better live, but have access to anything we want.

When there’s a disruption in one resource, as far as accessibility to it, it has a chain reaction that affects everything else.

Take the war in Ukraine and it’s repercussions across the world. The two resources that have been disputed right now is wheat and oil. Two of the major suppliers of indispensable commodities in the world are at war and their commodities are inaccessible or hard to obtain. Just the shortage of wheat has significant implications in the food that is processed for consumption around the world, because it’s not only used to feed humans, but other sources of meat for humans.

But what happens in a deflationary trend? One would think we just produced more of something and we have to sell it at a lower price, until we get back to an equilibrium of supply and demand. But it’s not that simple. Causes of deflation could be:

A) Lower numbers of population. While access to the natural resource is there.

B) Overproduction of a certain good.

The first one, indicates that either people are dying, leaving or not reproducing. And the demand is lowering constantly.

Now, think about why would people leave a community. A quick example: crime. Two examples: People leaving their towns in rural Central America for the US, or in Africa for Europe because their home towns are overrun by warlords, gangs and drug cartels. Likewise, communities in the US that are run by drugs and crime is rampant. You have a choice to flee or die.

The second one speaks about the over production of something. By default, companies don’t try to over produce, because the costs associated to storage and maintaining an inventory could eat up on their earnings. But there are times when overproduction happens because of a bubble. The easiest example for this, is the Tulip crises of the 1400s. Tulips became a sought after commodity that the prices started going up. Suddenly Tulios went from a nice flower to an investment. A bubble was created. People decided that it was a better investment to buy and sell tulips, than plant wheat, or sell meat, which drove the prices of food up; some people even mortgaged their home or land to invest the money in Tulips. For a time, that created wealth and people spent it in luxury. And then, Tulips were over produced and came out of style. Demand disappeared almost instantly. And then people didn’t have money to pay their debts, to buy food, live in a safe place. Famine and plagues started…and prices went down because there was no demand for anything.

So…that’s why you don’t want to see a lot of either, inflation or deflation, but it’s also why you see more inflation than deflation.

Inflation is a tax on hoarding money. In an ideal world, it will push rich people and companies to reinvest their wealth in the economy, instead of hoarding it. Unfortunately, in the real world it doesn't work on the very rich, so it only affects the upper middle class and the moderately rich.

More than 90% of the money we use does not come from the central banks, i.e. does not exist as cash and is not backed by the government directly. Instead it is book money. Here is how this works:

When a bank lends you $1000 at 10% interest for a year, they don't physically have that money. Instead, they write into your account: We owe you $1000. They also write into their account: Skaterboy42069 owes us $1100.

See how the $1000 you have in your account just appeared out of nowhere? They are of course balanced by the bank's $1000, but there is an extra $100 (the interest) that was created permanently. It's up to you to come up with a way of making those extra $100 in one year. Now apply that to the entire monetary system and the whole economy, and you see how the only way is up.

As an aside: This is also precisely the reason why we need ~2% GDP growth annually, and any standstill or even shrinking is an absolute disaster. Debts don't get repaid and are defaulted on, and money literally evaporates. Ask yourself this: imagine GDP drops 10% over night and what that would do to the economy. Why would that be such a disaster if it would simply send us back to about 2018 GDP-wise (when we all lived in caves)?

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.

In 3 words: printer goes brrrr

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.

The two largest central banks in the world, the Federal Reserve and the European Central Bank, have explicit mandates for keeping inflation under control.

The European Central Bank is tasked with

the achievement of a high degree of price stability; this will be apparent from a rate of inflation.

The Federal Reserve has the "Dual Mandate" of price stability and achieving the maximum sustainable employment.

Price stability is about controlling inflation. It's complicated, but high inflation both affects the direct price of goods and services and expectations of their future prices. So, in a high inflation environment, what costs $10 now may costs $12-$14 in the future.

We saw this after COVID, when supply chain issues became a huge problem and it was difficult to say how much goods and services would cost. Multinational corporations bragged about their ability to "price-take", or raise prices in response to supply chain delays and have consumers continue to pay it.

This demonstrates, at least in part, why our buying decreases far more often than it increases: large companies can "pass through" inflationary costs to consumers. You need soap to clean yourself and food to eat? Well, Proctor and Gamble and Tyson Foods bet they can raise prices on soap and chicken and that you'll pay it. And you do. Because what choice do you have?

In the U.S. specifically, there is the flip side of inflation: the maximum sustainable employment rate. If too many people are employed, the labor markets get hot. You know what that means? Mo' money for you! Mo' money for me! Mo' money for everybody!

You know what that also means? Demand for goods and services is going to go up. Supply is going to lag behind. It's like a bunch of isolated people with jobs wanting a lot of stuff during and after a pandemic that decreased the supply of goods and services. This causes...inflation. All those people are going to be willing to pay more than the next person (up to a point) for the same Nordictrack Treadmill.

This also demonstrates another reason companies can pass through inflationary costs: under a hot labor market, consumers are willing to pay higher prices.

So, there are at least two reasons why consumer buying power decreases more often than it increases. Conditions are such that either

1. Consumers must pay more because what choice do they have?
2. Consumer want to pay more because the value a good or service higher than the next person up to a point.

In contrast, the primary way consumer buying power increases is if they make more money. (That happens in a hot labor market...but then the consumer gives the surplus away if they're not careful). However, that raise must be greater than the rate of inflation. If you get a 1% raise and inflation is 2%, well, your buying power decreased, even though you'll still see a higher number on your paycheck. If you get a 3% raise and inflation is 2%, your buying power increased.

The challenge for businesses is handling inflationary increases in capital and labor. It's easy for capital: you need stuff to produce stuff. And it's likely you can pass through those costs to consumers.

In contrast, labor has all sort of demands like...water/bathroom breaks, mandated over time, safety regulations, etc. And workers don't see a decrease in their chances of being maimed at work as an increase in value from their employer. If a company is going to invest in its employees, given a certain dollar amount, workers would generally prefer to see that money go into their pockets rather than be invested in stricter adherence to safety regulations or more breaks while at work. But companies can't often make that choice, the law changed and they must adhere to safety regulations. So, no raise for you!

Now, it's certainly more complicated than that. Businesses have a lot of financial demands, of which employee compensation is a small, though often significant, piece of the pie. It's harder to give raises than it might seem. Unless your CEO makes one hundred thousand dollars a second, as some do, then wage increases comparable to inflation may be difficult.

Below this, I'm going to suggest some other ideas for increasing buying power that are...unconventional.

Tldr our economy is designed this way. The federal bank sets monetary policy to maintain inflation.

I just took an econ-102 course intro to macroeconomics that covers this. It was free at my community college. I recommend doing it!

hints :

• inflation increases the nominal amount of tax on added value, good for countries balance sheets
• inflation decreases the real value of sovereign debts
• a company will never lower its prices as long as sales do not plunge
• energy actors only look at natural gas prices when it raises, never when it comes down

you could add your own items to the list, it's a long one.

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.