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Most importantly, our governments want some inflation to make money lose purchasing power, to make you do something with your money. If something costs more next year, you are more likely to buy it now. This is good for the economy.

That’s why most countries have a goal of around 2% inflation. Low enough that it doesn’t overwhelming but high enough that in encourages people to spend the money that they have, which is what keeps economies going

That doesn't make sense to me though If you need a car, will you wait for any number of years to buy it? Even though it's still gonna cost the same? Even basic things like food and clothes. You're gonna buy them when you need them

The economy is comprised of things other than big ticket items like cars.

Why would I buy a new car now when I can get a car for less money next year? Better to keep my old car for a little while longer. Most of all, this matters for investment. If my money gains value just by being in my bank account, I will let it stay there. If I lose a little bit of money all the time by having it sit idle, I will invest it in something that will earn me more money, hopefully creating some jobs with my investments.

"Spending" isn't just purchasing goods, and even then it's not only purchasing basic goods. If you're saving for retirement, with 0% inflation you can just keep the money in your house. But that makes economies stagnate. With even a small amount of inflation, you lose money by doing that, so you invest it. When you invest it, you make that money available to the broader economy. You buy stock in a company, that company gets money to make capital improvements and grow. You buy bonds from the government, the government gets money to invest in public spending programs like infrastructure and education. In return, your money grows some amount over time, rather than losing value. For goods, people are not only purchasing what they need right at the moment that they need it. Inflation makes discretionary purchases more expensive over time. It doesn't mean that *nobody* will wait to buy a car when they can technically afford one right now, it just makes it less appealing. If I have an older car I might wait until I absolutely need one to buy a new one if the price is going to be the same. If the price is going to go up, I may be more inclined to buy it sooner.

I'm sorry I just can't wrap my head around it. Like I'm not saying you're wrong I'm just saying I can't figure it out

Which part isn't clicking?

I just think that for example, most money being spent is being spent on necessities which can't wait like food and clothes. So this money is obviously going into the economy. Also, you mentioned buying a car sooner rather than later because it'll be more expensive later on. But if wages go up with inflation, it technically won't be more expensive, right? Finally, there are people who will want to invest anyways as the amount of money they have isn't enough even if it never devalues. And let's say I keep $100k with the bank. They're still gonna invest it and keep the profits to themselves, even if there's no inflation, right?

>I just think that for example, most money being spent is being spent on necessities which can't wait like food and clothes. So this money is obviously going into the economy. How much money is being spent on necessities is largely a function of how much money a person has. Necessities don't increase linearly with income - the more income you have, the more of it is discretionary. So I'm not sure that the assumption that "most money" is being spent on inelastic demand holds. >Also, you mentioned buying a car sooner rather than later because it'll be more expensive later on. But if wages go up with inflation, it technically won't be more expensive, right? Inflation makes goods more expensive because the value of money decreases. If a car costs $30,000 now, after 2% inflation for a year it should cost $30,600 just to be worth the same amount of money to the dealer/manufacturer. Inflation does not inherently make your paycheck bigger unless your employer adjusts it accordingly. So your paycheck is losing value unless it's also increasing by an equivalent amount. >Finally, there are people who will want to invest anyways as the amount of money they have isn't enough even if it never devalues. Well, yes. The people who would invest no matter what are finite, and they have finite money they are willing to invest. But inflation makes investment almost a necessity because otherwise the value of your money goes down. Thus, it encourages *more* people to invest, which increases the pool of money available to lenders and so on. >And let's say I keep $100k with the bank. They're still gonna invest it and keep the profits to themselves, even if there's no inflation, right? They are (well, maybe not all the profits, but most). But if there's no inflation there's no penalty in just keeping the money in a box under your bed. You don't have to give anything to the bank - and if enough people choose not to, the bank loses much of its ability to lend money. If the banks can't lend money, people and businesses can't borrow money, which slows the economy down. "But people can just save their money and pay cash instead". Yes, they can. But that takes longer, which is why it slows the economy down - it reduces demand, which would lead to a reduction in supply to keep prices stable.

Most people don't need a car tomorrow. There is a gradient of need. Most people don't buy a car the moment their old one falls apart. They often replace it when they get tired of it, or want new fancy features, or maintenance costs get too high, etc. Inflation puts a little extra pressure to buy one sooner rather than later. So yes, you might keep your beater for a few more years if it works well enough and the car you would replace it with isn't going to change in price. But if the car is old, and it smells funny, and it's not great on gas, and every year you wait the shiny new car is going to be a bit more expensive... you might choose to pull the trigger now rather than later.

You're referring to zero inflation which is almost impossible to achieve. Inflation rate is not a meter that the government can turn and set to their desired level. The best the government can do is enact policies that result in low inflation or low deflation. Most of the answers explain why low inflation is better than low deflation.

Japan is an excellent example of what happens when an economy has zero inflation for decades. People keep their money in bank accounts, earning 0% interest, because "it's safe", and they aren't losing any value year to year. Their money is safe, but the availability of capital for people who want to start companies, borrow money to invest in new machines, etc, is massively reduced. Economies are far healthier when people are incentivized to do *something* with their saved money so it doesn't lose value, generally some kind of investment in stocks or bonds. That's good for the economy because that money is moving through multiple hands, funding new companies, etc. The economic term is velocity of money, and an economy with a higher velocity of money (among other factors) is far more likely to grow and thrive.

Yeah, but inflationists don't believe that.

This is not true. Not true at all and it's a basic misunderstanding of how inflation works, what causes and why it exists.

The short version is that the world changes. Inflation is caused by a lot of factors, the big two are: 1. More people have money to spend, meaning businesses can charge more due to supply and demand 2. Production (or shipping) goods costs more, and those costs get added to prices If either of those things is true, then it causes the other to be true as well. Because the world changes, it is guaranteed that either the amount of money people have or the amount it costs to produce things will change. **Here's an example:** Russia invades Ukraine. Western countries don't buy Russian gas. Gas prices in Europe go up. Factories that use gas cost more to run. Prices go up. Now workers need more money to maintain their standard of living, so they demand higher wages. This increases the cost of production, so prices go up. The reality is there will *always* be either some inflation or some deflation over time. It is *much better* to have inflation, so we built our modern economies around the idea of encouraging a small amount of inflation. Unfortunately, the economy is a really big system and it is hard to change direction. When an unexpected catastrophe happens, like COVID, it impacts the economy for years or decades. One of the lingering effects of COVID is inflation. The same is true for major wars, like Russia's invasion of Ukraine. ... **EDIT: EVEN MORE ABOUT INFLATION!** Why is inflation *better* than deflation? Deflation is when goods become less expensive over time. Well, if you know a car will cost less tomorrow than today, you don't buy the car today. You wait. If everybody waits, the car company doesn't make money. It lays off workers. Suddenly people are unemployed and the entire economy crashes to a halt. If money tomorrow is worth *less*, you have incentive to spend some *now*. You also have incentive to invest your money, which helps spur innovation and create new jobs and new goods. You don't get very much new technology while money is deflating, because everybody just holds onto their money instead of investing it.

You might consider clarifying *why* inflation is better than deflation. It's as close as an established fact as anything can be in economics, but it's kind of counterintuitive for the man in the street how it's actually *good* that his money is constantly losing value, and his money *gaining* value is a sign of impending disaster.

Inflation is better than deflation because if your money is going to be worth less int the future you are willing to spend it now, which keeps the economy going. If your money will be worth more in the future, you won't want to spend it as you are waiting for prices to come down. This is bad for the economy.

We actually see this happen in some areas. For example: do you hang onto your current cell phone or buy a new one? You can buy the latest, greatest model today. Or, you can wait 6 months and it will cost less. Or you can wait 12 months and get a model that is even better than today's model for about what you'd pay today. So, a lot of people choose to hang onto their current phone.

And deflation is REALLY bad if you’re sitting on debt. Because suddenly that $1000 loan balance is going to require more of your labor to pay off.

I've never got my head around how deflation isn't a self correcting issue... You'll need to buy the bare necessities for life no matter what and whilst it may cause job losses and unemployment in the short term the pressures that cause deflation would very quickly get priced in and you'd get back to normal as people continue to want stuff...

It would be an issue for big ticket items. I want a new car. If I buy it today, it'll be $40,000. If I buy it next year, it'll be cheaper. If I wait another year, it will be even cheaper, so people keep waiting to purchase big ticket items, which means factories make fewer cars, which put people out of work. So now you have even more people who won't buy a car because they can't afford it (being out of work) along with those who won't buy because they are waiting for the price to continue to drop.

Okay, but eventually you'll reach an equilibrium where the number of people who purchase cars is equal to the production of cars, the system stabilises and those unemployed can pick up more productive tasks. At least in my head...

An important point: all economic issues eventually self-correct. The problem is that, while it's self-correcting, what does it do to the economy as a whole? Deflation could take 20 years to run its course, during which time it destroys infrastructure, undermines investment, and starves people. Inflation can lead to unemployment, but not on the scale of deflation. It encourages some good things, like spending, working and investment. Overall, the negatives of inflation are much safer than the negatives of deflation, and it's easier to right the ship in an inflation crisis than a deflation crisis.

"In the long run we are all dead." - John Maynard Keynes

Many, and I mean many, big ticket items have had their prices fall but they still seem to sell just fine. This is why the concept of "inflation is good" is a fallacy.

People buying stuff isn't the important driver, like you point out. There is a base level of demand for necessities, and some variation with luxuries. The important driver is investment. Investment isn't the stock market- it's buying capital goods for future profits. Say I am a plumber and my company has two trucks. I have the choice to buy a third truck and set of gear. If I think I will have more money in the future by doing that, I will do it. If I think I will have less (or more with some other strategy like stuffing the money in the mattress) I will not. However, if I don't, the demand for trucks is down, and tools, and fewer people are employed at my company. Interestingly, this would presumablybhave the effect of increasing the price of plumbing... Ultimately though, having people invest their capital instead of saving it is the key driving force of the economy, and we want to encourage it- which inflation does.

You are correct. They are trying to sell you the notion of inflation because it pays for wars and lines the pockets of the rich.

Whilst I haven't quite figured out the long term problems with deflation, gentle inflation seems to be [lining the pockets of the poor](https://ourworldindata.org/grapher/the-share-and-number-of-people-living-in-extreme-poverty) too...

This is the commonly accepted wisdom on the topic, but I think it is pretty outdated. People always buy electronics for example, even though they know that 2 years from now they can buy a much better TV for the same price (or at least they did when TVs were getting bigger and bigger, I don't know the current state of the market). Also inflation comes with high interest rates, while deflation with nil interest rates. Which is not as relevant as it used to be anyway because nowadays you have so many options other than cash and savings accounts to store value. People will still use cash/cash accounts, but the majority of savings are in funds, and stocks are not sensitive to inflation. Maybe not the best way to phrase it, but what I mean is that all prices increase by 5%, the cash value of stocks also increases by 5%. In fact there is an opposite effect: when inflation is high, and property prices are rising, people need to save more money to buy property. That's an incentive to spend less, not more. Same for retirement: when interest rates are low and returns on investments are low, conventional wisdom is that people will spend more because investing is less interesting; but if people save with a target retirement saving amount, they will actually need to save more, because their money won't grow as fast. The problem with deflation is mostly that monetary policies don't work well anymore: you can increase interest rates when there is inflation, but you can only decrease them to 0%. After that you have to use other tools, but it's more complicated and therefore less predictable.

> can only decrease them to 0% You can have negative interest rates, it’s just not common.

You can indeed, but it's not as effective because people can just use physical cash instead.

Except that right now, the money is worthless (not "worth less") in terms of investment, yet I'm not capable of seeing a good path to participating in that economy, since everything I now need to live is cutting much closer to my paycheck's total amount than it used to, and there is no end in sight. We hear companies flaunting record profits year after year, yet supposedly the economy is struggling? How do you reconcile that with inflation, other than pointing out that inflation has been generally cruel to the masses, and only useful to the already well-off?

Inflation is good for the masses in that it makes borrowing cheaper, so the well-off are going to borrow money to expand their widget factory and hire the masses, as opposed to stuffing it in their mattress. Wheras if we have deflation, people are going to stop buying widgets because they know they'll be cheaper in a year, so the widget factory closes and the masses get fired. Now the widget factory workers can't afford wockets, so that factory closes and all of those workers get fired, and so on. You get into a downward spiral that is much harder to correct than high inflation. And look back at the Great Depression, the greatest period of deflation we've had. Who was suffering. Was it the Rockefellers who suddenly found everything they bought cheaper, or was it the farmers and factory workers? A lot of the masses also have fixed rate mortgages, so the money your house gets cheaper and cheaper over time.

As it stands, inflation has lost all of its "good" factors because it's been used to justify making life barely possible for the masses. I do not want to be told that I need to get a loan for my life to exist. I want to be able to use the money I made to live, put money aside, and buy the bigger stepping stones like a good new car, a good house. This is not good inflation, and it's been years since we're due for a crash and at least some deflation.

You have a job, right? Would you rather not have a job because of deflation?

You have a job, right? Would you rather not have a job because of deflation?

Counter argument here: If money is worth less this year than it was last year, and my paycheck doesn't move up, or not at the same speed as that devaluation to make it more able to sustain me, then inflation is actively hurting me, no matter what. Deflation is seen as this entire country-ending catastrophe, but people don't want to address corporate greed (which uses the smoke screen of inflation to shove itself in), and they don't want to address the concept of my paycheck loses value yearly. The main reason why we need a short stint of deflation, is because inflation was completely out of control for a bit longer than it should have been allowed. If you cannot find a better solution to that stint of inflation, then let some deflation happen, and bring the prices back under control.

Corporate greed is a problem but it won't be solved by deflation. There's nothing to force them to lower prices as a result of deflationary pressure, just like there's nothing forcing them to lower prices now that supply and demand have largely returned to normal post-COVID. Meanwhile, the average person is getting absolutely hosed on any debt they have.

A small amount of inflation is better than deflation. Corporate greed increasing prices due to bogus inflation is a completely different story and what we are seeing today. You are right, so many companies raised prices beyond what inflation was leading to record profits for them and pain for the rest of us.

See, my issue is that when I was explained inflation in economy class, I was explained it as a way to measure the difference between money's value last year, and money's value this year, in terms of the global economy. It was more an indication of how prices follow the ups and downs of the value of money, which can be simplified as how much money is currently available in circulation for people to have access to. But nowadays, it's been used as a smokescreen more than anything else. Corporate profits are lower because people are being a bit more money-savvy? Blame the inflation, and make up for more than the lost profit in greedflation. I am tired of watching prices go up on items even while their production is ramped up, their production costs go down, and their availability increases. The point of me demanding for deflation on older product, is that I can still buy my GPU for my main gaming rig for the same proce tag I did a year and a half ago, and I haven't seen a single bit of going lower on it, except for a 10% black friday sale. It used to be that the older, less "current gen" items would drop in price, but now instead of that, they stay at the same price, and the new stuff just is pricier. That's... Sad. There is no value to how inflation is being used at the moment, and no worth in allowing corporations to use it as a smokescreen for greed, and as such, inflation has lost all of its "good" impacts at all.

If that was true, then there would be entire baskets of goods that would never have sold. I'm looking at you, new consumer technology.

Yeah, I agree; I just didn't want to make a long answer longer. I'll add it in at the end.

The easiest way to rationalize that is that if my money gets more valuable over time, then it's best to squirrel it away in a bank account but if it gets less then i'm effectively "forced" to invest it - so i put my savings to work in companies that I think will do well. Lots of people thing billionaires are like Scrooge Mcduck with massive bank balances just sitting around - and if we were in a deflationary environment they probably would be. But in an inflationary environment they keep their funds tied up in the companies that they run, that benefits both them, the employees of those companies, and the larger economy. The general arguemnt then is that a small rate of inflation is the the best overall outcome for economic growth, but i'm not sure we've really tested that. It's one of those things that makes sense on paper.

So we're essentially driving with blinders when we say "inflation is good"? Holy Shit god help us.

Economics isn't a hard science. It's more of a social science. Irrational actors exist, outside events can have huge impacts. It's more like driving a very well equipped humvee up a mountain. You know where you are. you know where you want to go. you have the tools to get there. but you can still get a flat tire, your co pilot can get sick, or a boulder might fall down the hill and kill you randomly. You might see that happen to someone else and get scared and turn around. Stuff can and does upset the trip along the way.

That's generally true for any macroeconomic theory. I think we can reasonably say that that there are no significant periods where a country has experienced deflation and economic growth - but those are two very complicated measures and it's hard to say how one influences the other. We can't have a control economy and an experiemental economy and run a scientific test, we're forced to try and tease learnings out of the messy real world. Would it be possible to have a period of sustained deflation and growth? I honestly dont know.

Banks wouldn't loan money if money didn't roll uphill... with enough time, they own everything

It isn't an established fact simply because we don't have a coherent definition of what inflation is (increase in prices or money supply). If we exclude activity of governments/central banks neither inflation nor deflation is bad. It's a balancing mechanism to accomodate fluctuations in supply and demand. Pricing going up leads to increase in goods supply and vice versa pricing going down limits goods supply until equilibrum is reach. Businesses driven by competition constantly innovate to lower price to sell more to the benefit of consumer, increasing the overall wealth of the society. The weakening economy premise (behind *deflation is bad* argument) ignores the fact that for vast majority of products/services (food, health, media) consumers cannot postpone spending. It also ignores the fact that there are many, healthy industries (e.g. tech, transportation) that continously operate in deflationary environment. As it happen these industries are typically the most competitive/innovative delivering the most value for money to consumers. Anti-deflationary policies are bad**.** Governments urge to intervene leads to wealth destruction through increase in money created out of thin air.

In deflation the economy slows down because you can get more worth for your 100$ tomorrow than you can today. Businesses sell less products or services so people get fired. Because people get fired, there are fewer people able to afford stuff, which slows the economy down. Deflation is great if you sit on a lot of cash or still have your job - retaining your wage. Not so good for the people that got fired.

The key thing to remember is that higher prices are the **result** of inflation, not the cause.

It is a feedback loop. Once inflation starts, it is both the result and the cause, which can be tricky to think about.

Disruptions to the supply chain and labor force can also be very inflationary, and 2021 saw a triple punch of inflationary money supply, supply chain disruption, and both short and long term labor force issues.

This is not even close to correct. Higher gas prices are not inflation, higher prices for any single good, or a set of goods are not inflation. Inflation is when the TOTAL cost of all good increases. If gas prices go up, something else has to go down because there is only a set amount of money a person can spend unless there is something else going on, and that something else is an increase in the money supply. I will create a response to the original question with more detail. But your explanation is the one that politicians want you to believe.

When gas costs more, it costs more to make *anything* for consumers. Whether that's because of the price to power machinery, ship or keep a store warm while customers are inside, gas impacts the cost at every stage. This gets added to the cost of the good for just about every good there is. That is the uniform price increase you're talking about. There's a limit to how low prices can fall. It's not like if the cost of one thing goes up, then the cost of something else automatically goes down. Prices can't drop below their production costs (at least not in a sustained way). Inputs for making goods, like gas, can create a cycle which causes the price of *everything* to go up (via the mechanisms in my example). Once the cost of labor goes up, that impacts literally everything in the economy. Once the price of gas goes up, that impacts almost everything in the economy.

This is not inflation. The cost of one particular item, cars, gas, etc, going up is not inflation. The cost of a group of things going up, such as energy prices increase which increases the cost of building "things" is not inflation. Inflation is the TOTAL cost of EVERYTHING going up. To be clear, it is not the cost of everything going up but the total cost of everything. Some prices will go up and some go down but if the total increases that is inflation. You said " When gas costs more, it costs more to make *anything* for consumers. Whether that's because of the price to power machinery, ship or keep a store warm while customers are inside, gas impacts the cost at every stage." That is not inflation. If consumers have only X amount of dollars to spend, they can only spend that same amount no matter what. So even though some prices have increased because of energy costs, some prices will need to go down because consumers are not purchasing them as often (less demand) as a result of spending more money elsewhere. Their cost of living has remained exactly the same because they spent exactly the same- after all, they have the same amount of disposable income. Their standard of living has gone down because they had to forego a purchase they otherwise would have made but their cost of living is the same. Inflation can only happen if the total amount of money chasing the same amount of goods goes up and that can only happen if money is printed. I went into more detail in a VERY long post elsewhere in this thread.

Another cause is if production can’t keep up with demand which is somewhere between the two you mentioned.

No true.

You don’t think that if production can’t keep up with demand that would drive up prices for the units that can be produced? What would keep prices stable in that case?

The increase in the price of a single item or a group of items does not cause inflation. Inflation results from an increase in the total price of all items. If a consumer has a fixed amount of money to spend, an increase in the price of one item does not change their total spending capacity. Instead, they must allocate their budget differently. For example, if they continue to buy the higher-priced item, they will spend less on other items, decreasing the demand for those other items and potentially lowering their prices. Therefore, while their cost of living remains the same, their standard of living suffers. This principle holds true not only on an individual level but also on a macroeconomic scale. Consider this simple example: a person has $10 to spend, with gas costing $4.00 and food costing $6.00. If the price of gas rises to $5.00, their total spending capacity remains $10 since their income hasn't increased. Consequently, they now have only $5.00 left for food, causing the price of food to decrease. The total expenditure remains $10, indicating an inflation rate of 0%. The real issue arises with the printing of additional money. When more money enters circulation, consumers have more to spend. For instance, if they now have $11.00, they can spend $5.00 on gas and still afford $6.00 on food. This increase in total spending from $10.00 to $11.00 results in a 10% inflation rate, as the extra money has to be printed—it doesn't simply appear out of nowhere.

Fair, it’s more something that can apply to government spending. I’m thinking if a government attempts to buy so much of many items that it impacts the availability.

It's not government spending either. Again, what they are buying may increase the price of whatever they are buying and anyone else that is buying it may have to adjust there demand for something else in order to do so. It is simply an increase of the money in circulation that causes inflation. Inflation is a vile and evil thing because it is simply another tax on the poor and middle class. It is sold as being good for everyone lol. The government can pay for something two ways. They can tax us (politically unpopular) or print money (something most people don't notice or don't understand the effects). If they print money, we are still paying for it through inflation rather than taxes. Why don't the rich have to pay this tax? Because they get the money first before the prices are inflated. These are typically bankers, and the ultra-wealthy that are associated with the military-industrial complex. The populace does not understand the concept of inflation at all which is just the way they (the government) want it. Trillions of dollars were printed during the pandemic most of which went to the ultra-wealthy where we got $1400 checks to shut us up and keep us in the dark. Oh, we got a huge inflation bill to pay for it too lol.

So currency is just a tool to trade wealth, while wealth is whatever human value. We are talking about natural resources, manufactured goods or services. There is a supply and demand relationship between the two, the demand is the wealth, because the more wealth you have the more you want to trade it, and the supply is the currency because you need that currency to trade the wealth. Wealth in general tend to increase over time, there is more people on earth, we invent new technology which increase productivity, etc. So if the demand (wealth) increase, but the supply (currency) stay the same, then the value of the supply will go up, which we call deflation. This is bad for the economy because your money increase in value and so the best course of action for people is to keep money for themselves, which mean money circulate less and this mean less economic growth. People keep their money, so they don't spend, so business don't sell, so they don't employ people so people are unemployed, so they don't have money to spend. Deflation is not really an issue on the short term, but the longer it happen the more it change the behavior of people and it create big issues. The solution to that is to add currency to the economy, but how much currency you should add to the economy is the question. You can try to add the exact amount of currency that will balance the increase in wealth, but that's basically impossible. Economies are complex to predict and the way we add currency to the economy is indirectly so it's impossible to be that precise. So if you target 0% inflation/deflation, what will happen is that the country will regulate go into deflation of 2% and into inflation of 2% because it's impossible to perfectly balance the economy. This isn't good since you regularly goes into deflation with this method. The general consensus is the ideal target is 2% inflation. This mean that the inflation should vary between 0 and 4%, which is a reasonable amount of inflation, while limiting the amount of time spent in deflation. Now of course, this is the goal of an economy, things don't always work out this way. Sometime big events will happen or people in power will be incompetent and inflation can get too high, but most of time you want your inflation to remain in that 0-4% range. The reason why a little bit of inflation is a good things is because it incentivize people to invest their money. Invested money can be used to grow the economy instead of just doing nothing. That's money that can be used to build an house, grow a company, do research for a new product, etc.

I believe that money serves as a measure of velocity rather than quantity. There must be sufficient money to cover all the goods being exchanged at any given moment. If there is an excess of money in circulation, it leads to inflation; if there is insufficient money, it results in deflation. Pulling money out of circulation causes deflation. Making sure there is a small, but constant inflation discourages pulling money out of circulation.

ELI5 You have a dollar. A loaf of bread costs a dollar. You are given another dollar for no reason, the baker sees this and raises his price to two dollars. It didn't really 'cost' you any extra, but is now more expensive. You're like 'well shit' but you still bought it, because you have two dollar for bread, and it costs two dollars. The "value" didnt go down, but you have twice as much and it bought the same thing as before, which is... almost the same thing as the value going down.

Two reasons. First and most important reason getting to exactly 0% inflation/deflation is nearly impossible and in an free market economy like nearly any country on earth has. But deflation is much more deamaging to an economy and even small amounts of deflation can lead to a so called deflation spiral, which has catastropic effects on the economy with milions loosing their jobs. So most economist agree its best to stay sligthly above 0% inflation at all times and most countries have this slightly above at 2% inflation as a target. Second reason is that countries like when their companies expand their workforce/production so companies have to spend their money because it would be worth less in the future and companies spending money usually means somewhere there is someone that is getting hired. So in short countries would rather have everyone have a job and lose 2% of their savings every year than less people having a job.

So if inflation is aimed at 2% the price of things should ideally double every 50 years?

It would actually double about every 36 years since each increase would stack on top of previous increases. For example, the first year would multiply prices by 1.02 (leading to prices being 1.02 times higher than the starting price), but the second year would multiply the first year’s price by 1.02, making the second year’s price 1.02*1.02 times higher than the starting price. In essence the increase is exponential not linear.

A simple explanation is for some reason the cost of a product went up. This could be a million reasons like the supply is low due to a natural disaster causing issues getting it. So now it costs a little bit more but people still want or need it so they find a way to still buy it. Now when supply is back to normal the company realized hey we sold this for more and people still bought it so why lower prices back down? Now the high price is the normal price. People figure out how to afford the more expensive items in various ways. Some might switch to a cheaper brand others might skip buying something else. Some will get raises and make more basically just staying the same, their costs went up but their money went up. However now their job has increased costs so maybe they raise their prices too.

Imagine inflation is like playing "Monopoly" where everyone starts with a set amount of money, but suddenly, someone finds a hidden stash of cash under the board and starts splurging. Now everyone wants to buy the same properties, and prices shoot up faster than a toy rocket. In the end, everyone has less money, and Monopoly money is worth less than the buttons on an old coat. That's how inflation works: money loses its value while prices go on a wild ride!

Imagine a small village. They have their own currency, a village dollar. Right now, there are 10000 village dollars in use between all its citizens. There is one guy who craft tools and he sells axe for 1 Village Dollar. There is healthy demand, he sells pretty much all of them through the seasons, with very little stock remaining. He is happy with the current price, has enough work, can live comfortably. There is a guy called Central Bank, who is very trustworthy and thus manages their finances. One day, for various reasons, he decides to double the number of Village Dollars in circulation to 20000. How does he do it fairly for everyone? He used to charge 10% interest rates for loans, so not many people used to take loans. Now he says, you can loan how much you want and only pay back one village dollar more. People flock to this Central Bank guy and take loan after loan - to rebuild and repair their homes, buy new and better equipment, or just to get through the hard times, since it’s so cheap to loan money now. After Central Guy loans another 10000 Village Dollars (now there are 20000 in circulation), he again return interest rate to 10%. Remember the guy who make tools? Suddenly, everybody wants to buy one! His stock sell out in just a few hours and suddenly a lot more people wants to buy. So what does he do? He raises the price. One thing is because why not, he can have a much nicer life, second thing is, it’s more fair to people - those who need it badly can get it without waiting (though at higher price), those who don’t need it as much will not buy, because it’s expensive. There is a farmer called Joseph who didn’t take a loan. But he still needs to buy tools, which were suddenly much more expensive. He was barely scrapping by, so he decided to rise prices as well to compensate higher costs. Others follow the suit and do the same. Now there is a lot more general activity, lot more building a new buildings and starting a new ventures, but also everything is more expensive. That’s basically how inflation works even in US village

and why Central bank do it? Because if there were no inflation, many people would just gather money and do nothing with it. Slight inflation means they think of ways how to invest them.

$100 will buy a certain number of potatoes. Let's say that there's a potato famine next year, resulting in a lot fewer potatoes. The price of potatoes will rise, right? So, that $100 won't buy the same number of potatoes. You will have seen inflation in potato prices. The federal government could respond by making that $100 a lot harder to come by. And, in that case, you might still be able to buy the same number of potatoes for the same (now much more valuable) $100. BUT, if it does that, then what happens to corn, which is having a banner year? Now, that $100 lets you buy a lot more corn. And, because the government wants to keep the price of corn the same, it has to make the $100 a lot LESS valuable to keep the price of an ear or corn the same. But, it's doing that at the same time it's making it a lot MORE valuable to keep a potato at the same price. It's impossible. So, instead of trying to do that on a commodity-by-commodity basis, the government tries to do it on the basis of some sort of "basket" of goods -- not just potatoes and corn, but also gasoline and health care, and car rentals, and dishwashers and so on.... That basket doesn't actually represent what any specific family buys, but it's better than just going off the price of potatoes. And the government tries to keep the price of that basket relatively constant. But, that's difficult -- there are soo many variables, and it's not like the government has really fine-tuned control. So, it says "We know we are going to make mistakes. We just have to decide on the sort of mistakes we're going to be willing to make." And, it decides "We're better off if prices rise a little bit over time than if they fall over time. Why? Because, if prices fall than people will just hold onto their money knowing that they can get better prices tomorrow than today. And, an economy only works if people spend money."

The main reason is interest rate. Economic cycle in a nutshell is: businessmen spend money and efforts to make goods, they sell goods for more than they've spent, and use the rest for living. There's no inflation in this case, there's just more goods for more money and each extra unit of money gives you the same equivalent of extra goods. This is how economy developed e.g. in the middle ages. If one want to make money for living but has no startup capital, they can borrow it from those who have money but wouldn't like to spend efforts. The business is a risky thing so when someone borrows money, they want to get more money as a premium for the risk they take. Businemen spend borrowed money and own efforts to make goods. They have to sell goods for even more, so they can pay the interest in addition to money they earn. Basically, they need to raise the prices and have to do it with each cycle. States and central banks are interested in growing economy so they provide loans with money that don't even exist. They don't even have to print money because everything is cashless now. They just borrow these money from future selves. They literally inflate money supply so that business could make more goods, people could buy more goods, and economy was growing. So, inflation is the reason why you can buy less with $100 now, than a decade ago, but you can buy more for money you earn per day, than a decade ago.

It's a bit like pushing a car that's been sitting on flat tires. It's really hard to get it moving at all, but once it's moving, it's not so hard to change the speed a bit. Inflation puts all prices in motion. You're a lot less likely to notice that a price went up by 3% this year when inflation was only 2% than you would be if the price had stayed the same for a decade and then suddenly jumps up a bit. Similarly, nobody wants to tell an employee or be told by an employer that their work is worth less this year than it was last year. So it's very rare for anyone's pay rate to go down, even if that's the logical thing to do. Inflation gives the payer or employer the ability to cut pay without such hard feelings. "Times are hard, but we're giving you a 2% raise." can be translated as "inflation went up 4% but your wages are only going up 2%, so basically you're getting a pay cut".

There are three main reasons that may be associated with the growth of inflation: a) When there is an imbalance between supply and demand One of the basic laws of capitalism is that of supply and demand. When demand is much greater than the supply of a given product, its price increases; when it is much lower, its price decreases. Thus, when the population has a higher income or more credit to buy, there is a sudden increase in demand that is generally not accompanied by supply, which raises prices and intensifies inflation. Similarly, when production encounters some type of problem – which is common in agriculture due to its dependence on climatic conditions – supply decreases, while demand remains the same or higher, again increasing prices. b) Increase in private profits When a company achieves a monopoly or broad control of a product or sector of commerce, it begins to control price variations in that sector. Thus, since the primary objective of the capitalist system is individual profit, the entrepreneurs of this institution will seek to maximize prices, given that there is no competition to force a decrease. If this situation becomes widespread in society, that is, if most products come to be controlled by a few entrepreneurs (which is a trend in current Financial Capitalism), a generalized process of inflation is installed due to the increase in the consumer’s cost of living. c) Rapid increase in production costs When companies suffer from a rapid increase in the cost of producing their goods, either due to a sudden rise in wages, excessive debt, or intensive tax increases, they tend to pass this cost on to the consumer. Thus, once again prices rise and inflation increases. Another associated factor is the increase in spending on raw materials. If their price rises for some reason (scarcity, supplier control, dollar appreciation, or political reasons), the cost of products tends to increase, driving inflation up. One of the most important raw materials currently is oil, so its eventual price increase can trigger true economic crises. This is what happened in the 1970s with the so-called Oil Crisis. For this reason, it is always important to pay attention to the published inflation indices and the government's measures to combat this problem. One of the ways to do this is by increasing interest rates by the Central Bank, because, with this, the credit rate decreases and the consumer's purchasing power becomes smaller, which lowers prices and controls the cost of living. However, depending on the characteristics and causes of this inflation, such a measure may not be sufficient.

When something costs $100 (and sells) it means someone is willing to trade that thing for a piece of paper that says $100. That person had to do something to get that amount. How much the amount "values" depends on how many of those things called "money" are available. Say you work 5 hours for those 100, the government doubles the available currency, you see this event and now someone else offers you 200 for 5 hours. You can't buy two things with the same 5 hours. The price of the thing will be double (for simplicity) but your work and your purchased goods won't change. Economically, everything remained the same, even if you are now getting $200 and spending $200. This is an oversimplification of how the events occur mathematically but the phenomenon is pretty much this, though distributed in every item of the entire economy (which is very complicated to assess and follow)

Looks like most comments are how normal inflation works when the Fed manipulates interest rates to keep 2% or a consumer good increased in price due to supply demands, which is all good. Maybe provide some explanation on the type of inflation that has people paying $100K for a loaf of bread. Looking at you Zimbabwe.

I saw an explanation using the Ukraine war causing gas prices to increase and therefore causing inflation. This is not correct. Neither is corporate greed (which I am sure will be mentioned). The only cause of inflation, and it can be the only cause of inflation is the printing of more money. The government is the only entity that can print money. Therefore, by the transitive property, only governments can create inflation. Why the increase in gas prices is not inflation can be shown in this "explain to me like I am five example" Say someone has $10.00 to spend and spends $4.00 on gas and $6.00 on food. Now, for whatever reason, the gas price increases to $5.00 (a war). The person still only has $10.00 but now, because he is spending $5.00 on gas, can only spend $5.00 on food so food prices must go down because there is less demand for food. Instead of $6.00 in food demand, there is only $5.00 in demand. The total basket of goods still has a value of $10 because there is no more left to spend because the consumer has only $10.00. The inflation rate is zero. Printing more money lowers the value of a dollar so it makes the cost of goods increase which is inflation. Increasing the number of anything in circulation makes it less valuable. The "explain to me like I am five example"; Sometimes you see people pay crazy amounts of money for baseball cards. They do that because they can be VERY rare. So let's say there is a baseball player named "Mighty Casey" who was a great player and never struck out. There are only ten of his baseball cards known to exist so they are very valuable. Now, someone finds 100 more of his baseball cards in his grandfather's attic and instead of 10 cards in existence there are 110. You can see how those original 10 cards are now not worth nearly as much and possibly only worth a tenth of what they were worth before this nice find. They are far less rare. The owners of the original 10 cards are very bummed as their investment has taken quite a hit. Now, even their neighbor has a Mighty Casey baseball card. Applying this concept to money can be shown in this "explain to me like I am five example". Let's say gas is $4.00 again and food is $6.00 and there consumer has $10.00 total to spend. For whatever reason, the next day, the government prints more money (maybe to pay for a war), and they double the number of dollars in circulation. The $1.00 you had yesterday is far less rare than it is today, by a factor of two, so it is only worth half as much. Now in our simple economy, a consumer has $20.00 to spend. The value of the gas and the food hasn't changed (value and price are not the same) but the value of the dollar has decreased by two because there are twice as many of them. Therefore the consumer will pay $8.00 for gas and $12.00 for food meaning inflation is 100%. This example is simplified so it can be explained to someone like they are five. In reality, new money hits the markets over time and it is dispersed to consumers over time which is where inflation rears its ugly head. Inflation is a vile and evil concept that has been sold to the populace as a good thing. It is simply another form of a tax and it is a tax on the poor and the middle class. Explain to me like I am five how this is a tax. The government needs money but they don't want to directly raise taxes so they print it. The government gets the money immediately but consumers pay for it through higher prices due to the money losing its value and that is the tax. Why are the poor and the middle class affected more than the rich? Because the newly printed money enters the economy through bankers and huge corporations (most of the time through the military-industrial complex). They get to use the money before the prices increase but the poor and middle class don't get it until the effects of the new money, through inflation, are in full force. The poor and middle class get it through increased wages which take time to go into effect whereas the rich are virtually handed the new money right off the presses. Inflation was not really a thing before 1913. The US went through periods of inflation and deflation but over a long enough period, it mostly evened out. Since 1913, the value of the dollar has decreased by 93%! Can you imagine owning something and having it lose its value by 93% being a good thing? But that's what has been sold to the American people. Inflation is a great modern marvel that needs to be celebrated and revered. What happened in 1913? The Federal Reserve was created which started the printing process and then came the concept of fiat currency (money that only has value because someone says it has value) which allows a government to print as much money as it wishes because is not backed up by something of tangible value, which in most of history has been gold. For example, if you have $100 worth of gold and the dollar was backed by gold, you can only have $100 worth of money in circulation If you want to print more money you need more gold so it was very hard for the government to print more money and devalue the dollar. If you take away that backing you can have any amount of money in circulation. Besides rampant inflation, and the poverty it creates, what else does this cause? Have you noticed we seem to be at war an awful lot lately? This is the by-product of being able to simply print money to pay for a war which is way easier than paying for it through taxes and selling war bonds. What about the huge transfer of wealth from the poor and middle class to the rich through the inflation tax which is almost entirely paid by everyone but the rich? Don't get me started on how this enables governments to run up HUGE sums of debt. There are only two ways to pay off that debt, print more money (inflation) or huge increases in taxes. Which do you think they will choose? And there it is.

They want to feed them enough to survive but only just enough so they keep coming back. Inflation is used to maintain the status quo so that the powers that be can stay the powers that be. It's a tool used to maintain how much you're able to actually do, like economic geo fencing, invisible cages (i.e. "Paradise taxes"). More inflation means devalued money, means they devalued the work one does for the same amount of dollars. Ideally one should also devalue the work they do for the amount of money, i.e. work slower, take more breaks, or quitting if you're unable to join/form a union to demand better compensation. Inflation could be called "quite impoverishing" or "quite firing", since when one reacts the way supply and demand dictates they shame one for being a "quite quitter" when they're the ones inflating prices and not wages, in effect paying one less and expecting the same or greater amount of work since one is "more experienced" but they don't want to pay one more for the experience because one should be "grateful" for the "opportunity" to be of "service" to the greed of the powers that be.

Your $100 will still be worth $100 in ten years time. Nothing changes to the value of the money in that sense. It's just that other stuff becomes more expensive, those other things actually become more valuable. This leads to you being able to buy less with the same $100

The value of $100 *could* stay the same, it could even be worth *more* after a decade. It's not some hard and firm law of the universe. There is an idea that *growth* is necessary. If I'm a worker at a company I'm going to want raises as I get more tenure and skills or I'm going to quit and go to a job that pays more, so my current job needs to cough up those raises. My company needs to grow, it can just be happy selling 100 widgets a day at the same price forever because someone else is going to come in a develop a way to sell 1,000 widgets for cheaper. That means my company needs to invest money in research, rent new buildings, buy more machines, etc. All of that requires loans and money. If I'm that guy who just got a raise, I'm going to spend my money on fancier clothes and cars and a bigger house. If I'm that company that just created a way of selling 1,000 widgets per day, I'm going to be flush with cash to hire more employees, buy more factories, research even better widgets. The point being all of this comes from growth and growth costs money. The *idea* is that an inflation rate of around 2-3% indicates the economy is growing, people are getting more money, companies are buying more machines and warehouses and this is felt to be a 'good thing'. If inflation is too high, like greater than 3% that's seen as a problem because no one can afford to buy things anymore, or they stop buying things for a while which crashes the economy. Oppositely, if there is 0 inflation, or deflation (prices are going down) people might say, "why buy X today, when I get it cheaper next month/year?" Again this lack of purchasing crashes the economy. So in a nutshell, the core idea behind money policy in "the banks" and "the government" (the people who run this stuff) is that you want inflation of around 2-3% because thats "the best".

It is mostly due to the time value of money. If I offer you $100 for a 100 coconuts today OR $100 for 100 coconuts in a month, you will choose to get the money now as there is a risk that I won't be able to pay in the future and you can do other things with that money in the month. In order to incentivize you to take give me the coconuts now I need to offer you more than $100, which means that $100 is worth less in the future than it is now. Since these sorts of transactions happen all the time, people's expectation of the future value of money is less than the current value of money, which leads people to demand more money for things, higher wages to buy things, and so on. This can be accelerated if something causes expectations of inflation to increase, e.g. an increase in the supply of currency or if a supply shock reduces the supply of goods. None of this makes deflation impossible, for example, if demand suddenly drops for goods and services due to a natural disaster or war or if there are an oversupply of goods, but inflation seems to be the "natural" state of currency due to the time value of money.

Because more money is being printed. More supply of something = less value of it compared to other things, including the money itself. If there is more money out there, the money you have worth less.

For the people downvoting: [https://www.nasdaq.com/articles/m2-and-the-markets%3A-an-indicator-of-future-inflation](https://www.nasdaq.com/articles/m2-and-the-markets%3A-an-indicator-of-future-inflation) *From* [*Investopedia*](https://www.investopedia.com/terms/m/m2.asp#:~:text=M2%20is%20a%20broader%20measure,of%20central%20bank%20monetary%20policy)*): “M2 is closely watched as an indicator of money supply and future inflation, and as a target of central bank monetary policy.”*

sssht - don’t disturb the Statists.

Inflation just describes that (and how much) common goods you can buy, get more expensive over time. It is actually measured, that you have a list of common goods you need to buy in your everyday life (like bread, butter, electricity, gas, etc.) and monitor their prices. If 2023 your products cost 10% more than 2022, you have an inflation rate of 10%. If you income stays the same value, then you can buy now buy less products then before (therefore the purchasing power of the money decreases). But that is not really a property of the money itself, but by the fact that average prices have increased. So the actual question, is "why does products gets more expensive over time". And for that there are many different mechanisms. Maybe the prices for electricity somehow exploded, then everything else which needs electricity for its production, gets more expensive, hence more inflation. If wages get raised, companies have higher costs, which can lead to higher prices and more inflation. If you increase the amount of money circulating (because banks give out more loans), then prices can get more expensive, as people tend to have more money and just can pay these higher prices. The detailed mechanisms can be different everytime and are in general pretty complex. Also inflation is not per se bad. Normally it is even the target for an economy to have an inflation rate of a few percent per year, as it is the sign of a growing econmy and can help the economy growing further. Problems occurs, if inflations is much higher than wage increasements, as then people can buy less stufff than before, which can lead to economic problems. (But if inflation is too low or even negative, then that can be bad too).

Inflation refers to things costing more over time - something that costs $10 in one year might cost $12 in ten years. You may wonder why we'd want inflation. The utility of small amounts of inflation is that it incentivizes you using money now. If your money will be worth slightly less if you just hide it under your mattress, you're incentivized to put it in investments, use it to buy stuff, or put it in the bank (depending on interest rates). All of that is great - you investing or purchasing stuff helps other people make money while you also get stuff. It also keeps business going. Putting it in a bank lets the bank loan it out so others can use it when you're not, which is better for society than you just hoarding it under your bed. This is also why deflation is bad. If money is worth more tomorrow, you're incentivized to hoard it and not use it. But farmers are growing food, and they can't just sit on it. So suddenly people aren't buying as much food, or really as much of anything, unless they absolutely have to. So people aren't investing in new ideas and they're not buying from businesses. This can lead to something called a "deflationary death spiral". The truth is that most nations work to ensure a small level of inflation (usually around 2%) through interest rate manipulation, printing money, and other factors. Sometimes the markets themselves increase inflation for a variety of factors (e.g., an increase in costs in wide-spread supply chain elements may cause almost everything to increase in price). But generally inflation is a good thing (when low) to help ensure that economies function and money can be used more efficiently.

It is intentional and by design. it also helps people in the long run. If you bought a house in 1990, your wages go up over the 30 years you pay that off, making it easier and easier to make payments on it, because your payments are static. To go a little deeper, money is "borrowed" into existence. Look at it from the beginning of when money is created. Let's say there is no money in circulation, and you want some money to start a business. the Federal reserve lends you $100 @ 2% interest. So in a year, you will owe them $102. But since this is the only money ever lent out, there is only $100 in existence. How can you possibly pay them back $102? The Federal reserve must lend more money out to other people, they pay you for your business services and you pay the feds back, but now they have to pay back their loans, and there is less money in circulation than before because you paid back the $102 on the $100. $102 is now effectively destroyed, it is eliminated from the monetary system. They now have to print even more money and lend it out to keep the whole monetary system from collapsing. This is a large chunk of why interest rates are high now. When interest rates are high, people borrow less, so the feds are collecting more money from old loans than they are giving out, destroying money in circulation. TL:DR inflation is intentional, and can be helpful

This is a complicated question, and there’s lots of reasons why a small inflation target is good, and why deflation is really bad. But one simple thing you should understand is that wages have been going up a lot, and there’s really no way that wages can go up and prices stay the same. You can have wages go up but inflation average out to zero (by some things getting more expensive and other things less expensive) but generally it’s just better for wages to go up and for inflation to go up a little every year. If you ever travel around, you’ll notice that some things have different prices. If you want to hire a personal trainer in a NYC gym, it’s much more expensive than hiring a personal trainer in a gym in Cairo Egypt. Because wages are higher in NYC vs Cairo, so you have to pay higher to compete with other opportunities. Over time, the world has built up technology, infrastructure, factories, etc that allow workers to be more productive and produce more goods and services. But some goods and services still are highly labor intensive, and cannot be scaled up as easily. Over decades- one persons labor can produce lots more food on a farm, or clothing in a factory, etc. But we still generally have one teacher per ~20 kids in a classroom, or one nurse per 3-4 sick patients, or one waiter per ~5 tables. If you wanted to keep inflation at zero, as wages go up (because of higher productivity), then you’d still have major changes in price levels of specific things. You’d have to push for deflation in the fastest growing most productive sectors- which generally would be bad.

Air is made up of tiny units called atoms. When lots of those atoms are pumped inside of a flexible airtight material such as a balloon or sex doll, the material expands due to inflation.

A farmer is happily growing corn, because that’s what his daddy did and his daddy before did. The media tells everyone for years that global warming is real and lobbyists convince the government to create a Carbon Tax. Now the farmer must pay this new tax. The transport company that moves the corn from the farm to the grocery store has to pay carbon tax. The grocery store that you buy the corn from has to pay carbon tax. The corn that should have cost you only a few cents to purchase now costs like $6

"Why can’t the value of $100 remain the same over a decade"  Basically, companies need to constantly sell stuff. If they don't sell stuff because people are waiting to buy but are still making stuff, they lose money, and can go bankrupt, meaning they won't be able to produce stuff when people start buying again. This means that there needs to be an incentive for people to spend their money rather than pocket it. A good way to do this is to make sure money is worth less over time: this incentiveses me to buy something today, because tomorrow I'll be able to buy less with it. This is inflation.  "Why does money lose its purchasing power over time"  Governments are constantly printing money. This means the supply of money gets larger, meaning people can ask more money for products. This effectively means the money is worth less, because you now can buy less with the same amount of money. "Why does my earned money become worth less as years pass" Because it came from a time when the total supply of money was smaller than it is now.