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Question for the economists in this thread. Everyone seems to be saying that a lack of at least some inflation is bad but also that wages going up to meet it is bad. Isn't this a system automatically doomed to fail? Eventually in such a setup no one can afford anything and the economy collapses.
2% inflation and 2.5%-3% wage gains where the difference is made up by productivity gains would be the ideal.
The thing people are scared of is a wage-price spiral where inflation is 10% so wages have to rise 10% which increases employer costs so they raise prices 10% so wages have to rise 10% etc. High inflation that becomes self-perpetuating.
Wages rising faster than inflation is good, but the risk of a wage-price spiral is what people are afraid of with rising wages.
I honestly don't get it. Why do prices have to go up even if wages don't? It seems like some people say that some kind of inflation is absolutely necessary no matter what.
Because profit.
They don't HAVE to go up, but inflation is helpful to the economy and deflation is harmful. With deflation everyone stops spending because their dollar will buy more tomorrow, and that lack of activity hurts the economy.
With a little bit of steady inflation it encourages spending, but wages tend to keep up so it doesn't actually hurt people.
Also those times when inflation outpaces wage growth are theoretically helpful (in a market that doesn't have other failures) because if wage growth has stalled that means the value of that labor to the employer has decreased, and inflation helps reset that value calculation without making it a normal thing for companies to reduce your wage at an annual review, think of how hard that would be to budget for.
I really want to know where people got the idea that people would stop spending because their money is supposedly worth 2% more after a year. The only examples I see given are things like economic downturns (i.e. credit freezes and layoffs), where there is deflation because people are spending less for reasons other than deflation. To give an example of deflation not being harmful, just look at technology. Technology gets better and cheaper all the time, but it's not like nobody is buying technology, quite the opposite in fact.
I've read that it's a debt problem more than anything else. The world runs on credit, and inflation decreases the debt burden. When dollar value goes down thanks to the inflation, the value of the debt also goes down so it becomes easier to pay off (at least for those who do get inflation raises...). So essentially the rich get richer thanks to inflation.
That's factored into the interest rate of loans. Inflation only decreases the debt burden when inflation increases higher than the average rate AND the one who needs to pay is actually getting more money. What's the difference between a loan with a 6% interest rate when there's 2% inflation and a loan with a 2% interest rate when there's 2% deflation?
It's nearly impossible for us to maintain the value of money. More is printed every day, much is destroyed at a rate that can't be tracked, and the economy is fucking complex. Because of all that it will either be in an inflationary or deflationary state at any given moment
Generally speaking inflation is better overall than deflation, so we try to keep a low inflation rate going so it's not out of control and doesn't enter deflation