I considered answering this one, but while mapping out what I knew about inflation, I realized, I don’t really know either. I know what it means, but not the how’s and the why. Although, I’m betting corporate greed is behind it.
If your money is worth less today than it will be tomorrow, you won’t spend it. Burying every extra penny in your back yard would be the optimal saving strategy. But if nobody spent money outside the absolute essentials, commerce would grind to a halt. No jobs, no entertainment, no standard of living.
So the central bank wants a little inflation. It encourages people to spend some, powering the economy. Too much is bad, though, so they target 2-3% annually. The number of levers and dials they have to make that happen is finite, so it doesn’t always fall in that range over a given short time period, but it’s pretty accurate in the long term.
By printing more/less money, or making borrowing easier/harder (the fed rate, in the US), they can influence the amount of cash floating around to try to keep things in that ideal range.
Whether a currency-based economy is the best way to distribute resources is a whole different discussion, but every modern society works essentially this way.
I considered answering this one, but while mapping out what I knew about inflation, I realized, I don’t really know either. I know what it means, but not the how’s and the why. Although, I’m betting corporate greed is behind it.
We can start with the opposite: deflation.
If your money is worth less today than it will be tomorrow, you won’t spend it. Burying every extra penny in your back yard would be the optimal saving strategy. But if nobody spent money outside the absolute essentials, commerce would grind to a halt. No jobs, no entertainment, no standard of living.
So the central bank wants a little inflation. It encourages people to spend some, powering the economy. Too much is bad, though, so they target 2-3% annually. The number of levers and dials they have to make that happen is finite, so it doesn’t always fall in that range over a given short time period, but it’s pretty accurate in the long term.
By printing more/less money, or making borrowing easier/harder (the fed rate, in the US), they can influence the amount of cash floating around to try to keep things in that ideal range.
Whether a currency-based economy is the best way to distribute resources is a whole different discussion, but every modern society works essentially this way.