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.
So inflation isn’t actually good, it’s an active economy that’s good
Yes, but a healthy economy becomes more active if there is a healthy inflation to provide additional lube. 2% is roughly where inflation offers pretty good lubricant without being a pita
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.
It’s not guessing. It’s a pretty specific formula.
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.
Inflation itself is also good, assuming your salary goes up at the same rate.
If you take out a home loan, then over the 30 years you pay off the house, the mortgage payments make up a smaller and smaller part of your paycheck.
Same for car loans, and student loans.
Basically, inflation encourages smart use of debt.
That’s generally not true in practice though. Nominal interest rates on loans (the rate on paper) will adjust with inflation so the real interest rate (adjusted for inflation) is positive. As others have pointed out, the banks wouldn’t accept a loss just because of high inflation.
But that’s included in the loan if the bank doesn’t want to go bankrupt.
Depending on where you live, mortgages can be either fixed or variable. Canada’s mortgages typically change over time. The US’s mortgages are typically fixed for a specific period.
Don’t focus so much on the actual numbers - this is just an example - the idea is the same regardless of what you plug in.
Let’s say it’s 1996 and you live in a midsize town USA. You borrow $100,000 at 5% APR with a 30 year fixed mortgage. Your monthly payment is $537, with most of that going to interest in the first years, and most of it going to principal in the last few. Aside from insurance and property taxes, that $537 mortgage payment is exactly the same on month 1 as it is on month 360.
Lets say you bought the house in 1996 with a monthly salary of $1,500, and your salary only goes up exactly with inflation, you’d be making about $3,200 in 2026.
So the cost of your mortgage went from about 1/3rd of your salary to about 1/6th of your salary.
Yes, the 5% interest was higher than inflation that averaged 2.6% over that time period, but the actual % of your income that went to owning that home went down over the years.
That changes a BIT if you have a variable rate loan, but only in the sense that if interest rates changes, your home payments change (but the impact is lower as time goes on, because the amount you owe also goes down).
My take was just that banks know this “trick” and prevent it one way or another or they’d go broke.
What trick? It’s just a fact about how debt works.
The bank makes more from the interest than they lose from inflation. If inflation is 2.6% and your debt is 5% then they’re making money. Just because the overall payment becomes a smaller part of your salary doesn’t mean that the bank loses money.
It’s literally just basic math.
Well you won’t game anyone with it is all l’m saying.
so basically inflation is good only if you are one of the wealthy ones. being able to get a job that pays enough so you dont have to live hand to mouth. can even get a loan, pay it off and still have some money left over to maybe live. Also having a job you can trust doesnt kick you off at moments notice is also required to even consider any debt.
Over the long term, wages go up. Over the short term, people get left behind.
There are lots of things that suck for individuals, but are good for the economy as a whole. There are also lots of things that suck for the economy as a whole and are great for a select few.
This is why the bedrock of any sane civilized population is public education. We try to give most individuals the opportunity to learn as much about how our society works as possible to give individuals the best chance at success available.
This is also why the current geopolitical situation was built on decades of undermining public education with homeschooling and “parent choice” initiatives. The USA’s “No Child Left Behind” Act created an entire generation of children ripped out of public schools after decades of defunding public education created such poor conditions that parents were duped into believing dismantling public education was the solution.
Uneducated kids become ignorant, easily manipulated voters. Social media algorithms were specifically engineered to exploit this mechanism.