I think the real key to understanding how inflation can be desirable is to understand that when economists talk about inflation it is with the assumption that wages will rise by an equal amount.

And, generally speaking, this is actually true. There’s a lot of nuance to that statement, so please just trust that whatever counter you have is probably contained in the nuance. But, broadly, the math checks out. We will dig into that more, later. I promise.

So, the notion is that prices go up by 2%, and then your wages go up by 2%. So how does that help anything if all we’ve done by the end of the year is reset the status quo?

Well, there are two numbers that don’t get immediately affected when your pay goes up; your savings and your debts. With slow, gentle inflation, both of these things will, over time, shrink relative to your income, while your actual buying power should, ideally, remain the same.

Say you buy a car and you agree to pay $300 a month for it. Five years later, your pay has gone up by 10%, but your car payment doesn’t go up. It’s locked at the price you agreed at the time, meaning it’s now a smaller slice of your income.

Conversely, your savings effectively shrink every year. The combined effect of this is that people with lots of savings are encouraged to spend them, while people with lots of debts are rewarded. That means more money moves though the economy, creating a healthier economy, and it means that governments, who hold lots of debt, get to shrink that debt without ever having to pay it down. The UK government still holds debts from 300 years ago, because what was a massive expenditure at the time is now just a pittance. This is why governments can run permanent deficits (within reason) and not ever have to worry about the bill coming due; because it doesn’t.

For individuals, mild inflation benefits those who buy things on credit rather than outright, which under normal circumstances means us regular shlubs who need mortgages and car loans.

If you’re trying to understand why every business now cares only about juicing their share price and not about their long term health as a company, this is a big part of why. As inflation bites, the wealthy watch as their assets decrease in comparative value, so they want those assets to grow faster than inflation. That leads to a growth at all costs mentality.

So why isn’t this working? Well, one problem is the one I just mentioned; we’ll get back to that.

But the other reason is that not all inflation is the same. When prices go up because the economy is running hot, it means that the price of everything goes up. Everything includes your labour. But when prices go up because a pandemic made shipping more expensive, or because someone started a war in Iran, that increases the input costs your company is paying for whatever it is they do, but not their profit. So your boss doesn’t suddenly have a bunch of extra money to give you a pay rise. The value of your labour hasn’t increased, but the cost of things has. So we get price inflation without wage inflation.

So this is the real disconnect; there’s good invitation and bad inflation, and they’re not the same thing (and, frankly, the fact that we don’t have different terms for them is the cause of a huge amount of confusion and misunderstanding).

Healthy inflation is the natural result of growth in an economy. Economies tend to grow, because the human population of Earth tends to grow, which means more people doing more labour, making more stuff and buying more stuff. And of course, over time we develop new technologies and practices that increase the amount of goods each human can produce, which increases what each human can sell and thus what each human can buy.

(A quick aside here; the math generally seems to agree that global population will actually stabilize at some point, probably at around 10 billion. So the human growth portion of this equation is probably only over a specific timeline, and that’s without even factoring any kind of intentional degrowth.)

The problem is that what we’ve been seeing for much of the last decade isn’t inflation, it’s price shocks, the “bad inflation” that I referred to.

If you think back past 2020, you’ll recall that the word inflation really wasn’t in the public vocabulary in the same way. It was really only something that was being talked about by weirdo libertarians, who then used the combination of price shocks and massive government spending in the pandemic to sell this notion that this why governments shouldn’t spend money. This, of course, completely ignores that governments across the world spend truly unimaginable amounts of money resolving the financial crisis just ten years earlier and inflation remained so stubbornly low that Japan had to go out of its way to try to create some.

So, in short, moderate, controlled inflation good, price shocks bad.

In theory.

But of course, there’s more to it than that, because we all agree that the quality of life we can afford today and the quality of life we could afford even as recently as the 2000s are not the same thing. The Simpsons are supposed to be a working class family barely getting by and they live in a palace by modern standards.

This is because the way we measure “inflation” doesn’t work. At least, not for our purposes. To put it really simply, if you compare what we have now against the nineties, as a portion of our income TVs and computers have gone way down, while houses and college degrees have gone way up. That’s the problem. The things we want are cheaper while the things we need are more expensive. And as income inequality worsens, this problem only gets worse, because the wealthy can afford to buy up all the assets like housing, raising their price.

The other problem is that wages increasing in line with inflation relies on labour having the power to demand increased wages, and that’s something that’s being steadily stripped away from the poorest workers. Your six figure workers can still generally demand regular pay increases, or hop jobs for a bump, but the guys pulling shifts at McDonald’s aren’t seeing those same opportunities. So while, in aggregate, wages do tend to keep up with inflation, in reality the distribution is skewed. This is where governments need to step in with things like minimum wage increases which bring the floor up for everybody (this is why, in practice, minimum wage increases have never been observed to increase inflation; they’re just correcting the side of the equation that’s currently unbalanced) and why it is absolutely vital that we protect and encourage the ability for labour to organize and collectively bargain. If we’re going to have capitalism forced down our throats, mandatory unions should be a bare minimum guardrail.

So yes, steady, moderate inflation is good… And has absolutely nothing to do with why everything is unaffordable now.

Focus on simplicity rather than details:

Deflation (opposite of inflation) encourages people to put money under the pillow and wait for it to increase in value. If everyone does this the economy stagnates.

Inflation encourages people to spend the money now or invest it. Your spending is someone else’s income and their spending is your income. Investing is you risking your money to have someone else buy something that hopefully makes them more productive.

Too high inflation causes loss of trust in the currency and people start hoarding bricks or something else non perishable and the economy stagnates.

So central banks say that they will manipulate the currency so that the inflation is around say 2% which is low enough for people to trust it but high enough to encourage spending/investing.

It’s desirable to the wealthiest, not the general population.

Edit: Some sources

https://360library.com/economics/deflation/common-misconceptions-about.html

This lists a couple of “recent” historical examples you can verify.

And here’s a more detailed analysis:

https://mises.org/mises-daily/deflating-deflation-myth

Inflation, especially unexpected inflation, benefits debtors. The biggest debtors in the world are governments. It’s not zero sum. It creates winners and losers.

Let me add: I’m an engineer. By reason of existence, my work involves improving how we do stuff. My work involves helping people work more efficiently, use fewer resources, cost less etc. We should be doing more, with less because the tools and methods get better. So why do things keep getting more expensive? I don’t grok inflation. Not a bit of it.

The spending itself isn’t the benefit, it’s what that spending entails. When you purchase something new, whoever made it is now likely to make more. When you feel that you’re better off just not having the thing, less labor happens.

Don’t hoard cash, spend it on things with a return > 3% and you’ll be fine