I’ve been wondering this question for a while. Ignoring current events, why is a little bit of inflation desirable?
I do understand that it’s done to “stimulate” the economy so people don’t let their cash rot in a checking account, but isn’t it a zero-sum game? Everybody says that money is not meant to stay where it is, rather, should flow through the economy. But if the economy always needs injections of liquidity because otherwise it fails, isn’t the economy broken?
I feel like there’s something I can’t comprehend about that.
It’s worth calling out that there’s no real justification for that 2% figure. It’s a number that was pulled out of the air by the New Zealand version of the Fed in the late 80s, and it seems to work well, so everyone copied it.
There’s pretty broad consensus among economists that deflation is bad, and that inflation above about 3-4% is bad. Beyond that, we’re literally just guessing.
I think it’s worth pointing out that it’s all part of the neoliberalism fad that originated around that time. There are other ways to run an economy, but this inflation target one works well for neoliberalism because the wealthy own assets which hold their value through inflation. The middle class and below have money, which loses value through inflation. They pay what money they do have largely (directly or eventually) to the wealthy who then use it to buy more assets.
Sorry I may have channelled too much Gary Stevenson there.
I have read that it’s also very hard to break out of deflation so you can’t just try it a little, and the same goes for hyper inflation. A bit like walking the razors edge.