|Inflation Bad. Deflation Good.|
The IMF just posted a video on twitter which purports to explain; What is inflation?
Below is a transcript with my comments. Please link me to useful books / resources as applicable.
So you go to the store in New York and you buy a nice chair for $100 You go back the next year and the same chair is for $110 Prices went up, and if there's a sustained increase in the overall prices of goods and services, thats inflation. In this case 10%.
Good so far. Surprising to see the use of a realistic value of inflation used from the outset given anchoring is so important.
And if you are making the same salary next year but most prices go up, you'll feel poorer. And that's not a good thing.
Feel poorer? No, you will BE poorer.
Did you know, that some countries have experienced outrageous levels of inflation which is called hyperinflation. In 2008, in Zimbabwe for example, the inflation rate was 11,200,000% so back then you may have found a lot of use for this $100 trillion Zimbabwean dollar bill. In fact, Germany, Peru, and other countries, have also experienced hyperinflation in the past.
Hyperinflation occurs as a result of mismanagement of the issuance of the money supply. If a money supply can be managed, it will be mismanaged.
Over 100 years any amount of inflation is an outrageous amount. For example, According to the Bureau of Labor Statistics CPI (a low end estimate), today’s prices in 2020 are 1200% higher than average prices since 1920. That is an average inflation rate of 2.6% per year. The true inflation rate is far higher.
- When Money Dies by Adam Fergusson
- The Price of Tomorrow by Jeff Booth
Deflation, on the other hand, is prices going down, and that isn't a good thing either. Let's say prices are going down by 10%. So for that same $100 chair, it'll only cost you $90 next year. So knowing that the chair will be cheaper next year, people will hold off spending their money now. The leads to less demand for chairs, less production of chairs, and businesses needing fewer jobs making the chairs.
Some goods drop in price over time (e.g. Electronics) and yet people buy them. Why? Because they need a computer today, not in a year. Companies manufacturing desirable products will have no problem in a deflationary environment. Consumption behavior may indeed change. For example reduced spending on disposable products as people save to afford the durable products.
- The BIS did a historical study of deflation and found that 1. “At most there is only a weak association between deflation and slower growth.” & 2. “The relationship between changes in the consumer price index and output growth is episodic and weak”.
So, that's why countries try to pick a target of low stable inflation which is good for the entire economy, and good for me too because now I can afford a really nice chair.
With deflation, she would have been able to afford a nicer chair, or have been able to buy the same chair at a lower price.