Ask Lemmy

Money isn't real. Currency is real, but currency only represents money. Inflation is when a unit of currency lowers in value, or to put it another way, when it takes a greater amount of currency to obtain the same value. Prices go up, a loaf of bread goes from $2 to $4 over a decade. The bread is still worth the same, more-or-less. It's the currency used to buy it that changed in value.

Why have inflation? A small, and more importantly steady, amount is good (under capitalism), as it discourages hoarding wealth and incentivizes investing it. Hoard enough money to buy 100 loaves of bread and in ten years you'll only be able to buy 50, after all. So entities with excess wealth invest it, hopefully in ways that have a return better than inflation. A bank lends Jill McLastname $100K to buy a house. Inflation is 2%, Jill has good credit and is likely to pay it back, so they charge her 3% interest. Now instead of losing 2% every year, the bank gains 1%. And Jill gets to buy a house a decade sooner than if she was saving up. That's the idea, anyway?

When is inflation bad? When it's too high or too volatile. If your currency halves in value every year, there's all sorts of problems:

• you have to keep issuing larger banknotes, the design, security, and printing of which all have overhead costs

• saving is functionally impossible, causing people to live without a financial safety net

• people start using other currencies or even bartering, removing monetary policy from your control

And similarly, inflation that's too volatile also has problems:

• Lending becomes risky as a loan at a fixed percentage might lose you money instead of make you money

• Those selling goods or labour can't accurately estimate how much they should be selling them for, as the value of the currency doesn't change in a predictable way

How does inflation happen? There's at least two parts of this that I know of:

Part one is that healthy economies grow over time. A greater value of goods and services will be produced in year N+1 than in year N. Greater total value represented by the same amount of currency would be deflation, which encourages hoarding and stifles the growing economy, so it's important to add at least that much currency and better a little too much than not enough. That "little too much" is inflation.

Part two us that the institution issuing the currency is often a government, and governments sometimes need money in a hurry. Sure, they could try to borrow it, but they can also just... print more and spend it. Sure, it makes all the other currency worth less, but it's better than not being able to raise funds in an emergency.