I don't think inflation is a part of basic human psychology.
Regardless of your thoughts, it is.
Most jobs do not experience constant annual productivity gains, but everyone wants a raise at the end of the year and feels like shit when they don't get it. Nominal inflation allows you to give them a raise without impacting your bottom line. Win/win.
Most merchants what to see their prices go up, it signals to them that there is demand for their goods. A steady, slow, increasing demand for their goods makes them feel good. Even if the costs of operating their business are going up at a similar clip, it makes them feel good that they can increase their prices. Having to keep your prices the same or drop them is frustrating, as if you're not making progress. Win/win.
A steady, slow pace of inflation is ideal.
It allows for short term saving, like for a downpayment on a house, but discourages unhealthy hoarding over long periods of time. Again, win/win.
Look, I get it, Economics is an art, etc. but this stuff has been established over a long period of time and it works.
End-of-the-year raises can happen in a deflationary economy too, that's not really associated with the inflation / deflation debate. The amount of the raise can be less in nominal dollars but the employee gets the same real purchasing power.
> Most merchants what to see their prices go up, it signals to them that there is demand for their goods.
Price doesn't signal that there is demand for their goods, demand signals that there is demand. Price is a reflection of demand / supply, not the other way around.
> it makes them feel good that they can increase their prices.
But don't they, similarly, feel bad when they see everybody elses' prices also increase? They know that their paycheck gets less and less at other stores.
I think it's hard to draw a connection between feelings and economics.
> It allows for short term saving, like for a downpayment on a house, but discourages unhealthy hoarding over long periods of time. Again, win/win.
We live in a time of unprecedented levels of debt, both personal and national. I'd argue that such debt isn't all that healthy for the long-term growth of an economy.
1. 99% of people out there have no idea what purchasing power is.
2. The 1% that do either lack the ability or the will to calculate it.
3. It's entirely irrelevant, because in a deflationary environment you will be receiving a pay cut. Remember, most people do not experience productivity gains which necessitates a pay cut. If you're flipping burgers, you're flipping the same amount of burgers you did last year. If your productivity didn't increase and your boss gave you a raise or even kept your salary the same, he's taking money out of his pocket for you. Very nice boss you have there ... also, a very rare creature.
4. Now that you're cutting people's wages ... you've seriously pissed them off.
> Price doesn't signal that there is demand for their goods, demand signals that there is demand. Price is a reflection of demand / supply, not the other way around.
I'm glad you know what a demand curve is. I actually know how to calculate one since I have a formal education in economics and actually took econometrics.
I also ran a pretty successful retail outfit that had revenue in the millions.
Do you know how many times I calculated a demand curve? Zero.
It would have been a waste of time. Because I'm not the only player in the market. I don't have the data.
What data do I have? More people are buying my shit. I'm running out of stock. Let me increase my prices. My prices increased, now people are buying the same amount of shit they did before. I am making more money. I feel good. Oh crap, my supplier increased his prices. My supplier is an asshole. But people are buying my stuff, I just increased prices, things are good!
99% of merchants operate in this way. Yes, I knew the changes were nominal. They still made me feel good. Inflation wins.
> But don't they, similarly, feel bad when they see everybody elses' prices also increase? They know that their paycheck gets less and less at other stores.
No normal human being makes the connection between prices and their paycheck. Not even economists. Yes, that's the rational conclusion. The world doesn't work that way.
When I get a raise, I'm happy with my boss and about my work. When I see prices rise at the store, I'm pissed at the store. There is zero connection there, even though it's obviously all connected.
People aren't computers.
> I'd argue that such debt isn't all that healthy for the long-term growth of an economy.
While I would probably agree with you, the inverse of saving is not debt. It's the lack of saving. You can skip saving a single dollar and still be debt free.
Nope. Most economists prefer low but stable inflation around 1-3%.
this is an old theory and has been refined over time, but its still the basic model taught in economics courses.
