Readers Question: is the presence of inflation essential to the economy, is there any good that inflation will do to the economy as a whole?
The government have a target for inflation of 2%. In other words they would rather have inflation of 2% rather than 0%.
Inflation of 2% seems to be consistent with sustainable economic growth. If inflation fell to 0%, there is a fear of deflationary pressures which could cause a sharp fall in consumer spending.
It is also felt that with a low rate of inflation like 2%, it is easier for relative prices to adjust.
Another issues is that if inflation is fairly constant at 2%, then inflation meets peoples expectations. The biggest costs of inflation occur when the inflation is unanticipated. E.g. people expect inflation of 2%, but firms then find costs have increased 6 – 7%. – This kind of inflation could discourage investment.
For more details on the costs of deflation and why moderate inflation is OK.
1 comment so far ↓
there is no any proof or historical evidence that small stable inflation is still good. It is “generally” believed that it is good but actually neither of properties of inflation is researched well enough.
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