I was brought up to believe that inflation is evil. It destroys the value of your money and makes everything you buy more expensive. But the truth is, a little inflation (say 1 to 2%) is a good thing. Let’s look at why.
Let’s say that you are thinking of buying a rental property. Let’s say the inflation rate is running about 2% a year. In 10 years time, even with no real appreciation of the property, the value should be up over 20%. Now let’s say that instead we have 1% a year deflation for 10 years. In that case, the property would decline in value by 10%. Under which of these scenarios would you be more likely to buy that property? Of course it would be under a period of inflation.
That decision process is repeated over and over millions of times with many purchasing decisions. Buy something if there is some inflation, hold off if not. Imagine what that does to the economy if everyone is holding off buying things because of deflation. If you check the history you can easily see it. The last year that the US had deflation was 2009, not exactly a great year. The last long period the US had deflation was between 1928 and 1939 which if memory serves me was not exactly a great decade.
This is why you have governments in Europe trying desperately to increase the rate of inflation. They are trying to get people to spend their money and so stimulate their economies.
Now high inflation is a different animal. It destroys savings, and makes people do crazy things with their money. That’s not a good thing either. So now you know why the Federal Reserve is targeting an inflation rate of around 2%. Get people to spend their money, but not have so much inflation that the purchasing power of people’s savings are wiped out.
So root for some inflation… but not too much.