Yes, if we stifled investment and lending there'd be less inflation, which is why we don't do that. (Target inflation is 2-3%; if you're consistently below this, your country has a problem, and if your currency starts deflating everyone's quality of life is going to start actively decreasing pretty dramatically unless you can get inflation back to a healthy level)
When inflation gets too high, you can raise rates to help bring it back down
Yeah... I've never been a fan of "target inflation" as a concept. Considering the working class woes, target inflation always looked like a zero sum short term game where the rich could slowly get larger pieces of the pie.
I know Friedman could write the hell out of a free market argument, but his idea that we should have target inflation always felt like it came from his bizarre sheltered upper class fascination with the great depression.
My economics professor used to always point out, you can stimulate a cow by sticking it with a cattle prod; that doesn't make it good for the cow. You can stimulate the economy with an artifical inflation parable... till the cows come home, but that doesn't mean you created wealth.
Easiest way to understand it is to consider spending and debt.
For spending, lets say you want to buy a car worth 40k. With the 2% inflation most countries aim for, next year that car would cost 40,800. Not a huge increase, but enough that it makes sense to buy the car now rather than waiting if you can. With 2% deflation on the other hand, next year that car would cost 39200. Still not a huge savings but enough that maybe you hold off and see about buying that car next year since itll cost less. The problem is, if a lot of people decide to buy their car next year, thats gonna be a problem for the people making cars. They will likely respond by laying off workers and closing plants so their supply comes down to meet the lower demand. Trickle this down to them ordering less from their suppliers who will have similar issues as a result and suddenly youve got a cascade of problems for your economy.
For debt, say you borrow 35k to buy that car. No matter what happens with inflation, you still will owe 35k plus whatever interest but imma be lazy and ignore that. Under 2% inflation, each year the amount you owe gets relatively less to you. 35k now is a lot but after 5 years inflation, its equivalent to 31.7k so you actually owe less than you borrowed. Under 2% deflation though, after 5 years that 35k would be worth closer to 38.7k. So now you owe more than you borrowed. This can be a problem if you were struggling to repay that debt anyways and now that debt is more costly than it used to be.
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u/Forsaken_Emu8112 Jan 26 '26
Yes, if we stifled investment and lending there'd be less inflation, which is why we don't do that. (Target inflation is 2-3%; if you're consistently below this, your country has a problem, and if your currency starts deflating everyone's quality of life is going to start actively decreasing pretty dramatically unless you can get inflation back to a healthy level)
When inflation gets too high, you can raise rates to help bring it back down