I'm not an economist, so maybe someone more knowledgeable can weigh in. But my understanding is that deflation is worse. If you can just stick $10k under your mattress and expect it to be worth 10% more in a year you have no incentive to invest. Businesses will just hold their cash, banks won't have money to loan out and the sort of investments that provide new jobs, goods and services are a risky high-effort bet compared to just saving.
This (classic) argument is symmetric with respect to the value of money and quantity of goods. As in "if you know money will buy more in the future, it increases your incentive to sell now rather than wait for higher prices. And if you know prices will increase, you will hoard products." The argument doesn't favour either side.
One mechanism of inflation is that it effectively lowers wages (and other contracts) without negotiation. Asset prices are valued by markets and increase with inflation. It effectively transfers wealth from wage earners to capital owners.
Deflation would effectively increase wages instead, and require occasional renegotiations if productivity isn't keeping pace.
The problem is you can't really hoard products. Most products depreciate - it's a force of nature called entropy.
I think the argument from symmetry still holds, but it leads into a different conclusion. Since products (goods, physical assets) depreciate in value over time, money must too decrease in value. Hence you get inflation.
I believe that "natural rate of inflation" is driven by natural depreciation of goods and the free market mechanism that exchanges money and products as you describe.
Capital has multiple forms, I agree that physical goods generally depreciate over time. But there is also land, equity, and bonds and they all have their own market forces to deal with.
I'm hand-waving a lot of arguments and considerations with this statement, but from my perspective one advantage to 2-3% inflation is to incentivize owning capital that will outpace inflation. Land, equity, and bonds all have that potential.
Deflation may incentivize renegotiation of labor, but it also incentivizes hoarding of cash, which itself is not otherwise valuable. The value comes from it being passed around through the economy buying more assets. The more purchases -> the more money to be passed around -> the more opportunity to grow the economy. In a deflationary environment (at least in theory) this slows all of that down and decreases economic opportunity, which we generally don't want.
Right, a steady low level of inflation is a driver for risk taking, which drives investment cycle, hiring, etc. This cascades thru economy from firm to firm, in a virtuous cycle of growth.
Zero inflation even as a target would be hard to hit, as it would imply some absolute perfect match of supply/demand for goods.
Deflation leads to the opposite behavior - hoard your resources, don't invest, don't lend, don't hire. This then cascades through economy in a downward spiral.
Sure 10% deflation would be a problem but so is 10% inflation.
What about 1 or 2% deflation? People would still need food, to replace or repair cars. People would still want and need to buy houses.
Inflation to my mind supposes that we have to have perpetual growth, which is something that is not realistic.
If we grow 3 times the amount of corn that we need this year, do we need to plan to grow 3.1 times next year? Or decrease the cost by 2%? If all the inputs stay the same, where do you get the gains from(assuming that the process is as efficient and automated as possible)?
I think that by printing money and expecting a 1~2% gain every year we just end up robbing ourselves. Companies play games by not giving raises right away, moving production to areas of LCOL or shrinking goods and services but our retirement portfolios go up. Then at the end of the day, you are on a fixed income and having to squeeze down on your consumption.
As I said to a sibling, it is easy to say companies are greedy but how many of us are buying a more expensive product because we know that they treat their employees well? Or do we look at something then try and find it cheaper on Amazon?
In the 90's there was a large amount of disdain for lower income people who were shopping at Wal-mart because they were buying cheap plastic goods from China. The reason they were is because companies were offshoring their jobs. They weren't buying from Wal-mart because they like the products, they were there because they were trying to keep the same lifestyle they had before they lost their higher paying jobs. Companies that did not offshore were driven out of business as their customer base collapsed. We cheated our future selves to keep our inflation targets.
My general impression with most discourse about the economy and statements like "Inflation to my mind supposes that we have to have perpetual growth" is that it looks at transactions within the economy as zero-sum. And that is a false assumption. It grows and shrinks for myriad of reasons that aren't directly related to monetary policy. The monetary policy is there to attempt to keep things stable and predicable, that is all.
> If we grow 3 times the amount of corn that we need this year, do we need to plan to grow 3.1 times next year? Or decrease the cost by 2%? If all the inputs stay the same, where do you get the gains from(assuming that the process is as efficient and automated as possible)?
I think I get what you're driving at, but let me ask this question. Do you believe the price of corn in 1976 reflects the same market forces as the price of corn in 2026? Not the inflationary number alone, but why that corn costs what it does today versus 50 years ago?
There are microeconomic changes for sure, different farming techniques and maybe a different way of buying and selling surplus corn. But the life of a farm hand has likely changed, the average background of them has likely changed, the ownership model of the farm may have changed. The downstream buyers of corn have likely changed from mostly canned good manufacturers to fresh produce providers. And the macroeconomic forces surrounding everything has absolutely changed.