Are there any advantages of inflation?
Firstly it is interesting to note the government's target for inflation is CPI = 2% +/- 1. They have a target of 2% rather than 0%
If inflation is 0% or lower (deflation there can be several disadvantages)
- Deflation can cause lower spending. The value of money is increasing so people wait before buying goods.
- A small amount of inflation makes it easier for the relative price of goods to update.
- Deflation can cause real wages to rise above the equilibrium level. Workers resent a cut in nominal wages. Therefore a moderate amount of inflation enables an increase in nominal wages, without causing excessive real wage rises.
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