ZERO INFLATION!!!!

Why economies don’t have zero inflation?

Japan had virtually zero inflation for the past three decades!! Their GDP has been stagnant since then.  But price rise is something that is not acceptable to the consumers, right?

Over the past few years, inflation has been on everyone’s minds. United States had a spike in inflation of 9.1% in June 2022, the most since 1982. Due to surge in the interest rates by the central banks around the world, the rate of inflation has declined in almost every part of the world. Often, we have heard many economists saying “Little inflation is a good thing” But why?

#Inflation

Japan's Real Wage Growth 

The economic phenomenon "inflation" is commonly found in financial reports and news headlines. Inflation, as we know, is the gradual rise in the average price of goods and services within an economy. Wouldn’t it be great if there’s zero inflation in the economy??? No price Rise!!!

Inflation rate cannot be zero because policy makers don’t want it to be. SIMPLE!!!

Customers are incentivized to purchase throughout the inflation cycle because as demand rises, so does supply. This contributes to the growth of employee employment and pay scale. However, for this cycle to continue, wages must augment at a faster pace than prices of the products in order to preserve consumers' purchasing power.

On contrary, the purchasing power of money would also stay constant over time in a zero-inflation environment, enabling firms and consumers to make better long-term plans without having to take price rises for products into account. Because companies prefer not to maintain large inventories, an extended decline in the average price level of goods and services, known as deflation, is more likely to occur in the absence of inflation. Since consumers wouldn't be prepared for future price increases, this stability would deter buyers from making purchases now. As a result, consumers will spend less since they might put off purchases in anticipation of cheaper costs. This led to decreased sales for the company, a drop in pay, and job losses. And in the high political environment we are living in, this scenario is certainly not acceptable!!!

 US wages vs Inflation

An economy with zero inflation might lessen uncertainty since people and businesses wouldn't have to worry about inflation-related purchasing power erosion when making long-term financial planning and investment decisions. However, since there would be less uncertainty, businesses might be less inclined to invest today because they wouldn't be encouraged by the possibility of better returns due to inflation. Thus, reduced uncertainty sometimes Discourage Investing for future.

Monetary policy of central banks may have a limited impact to deal with this situation. A deflation-free economy would probably see a combination of benefits, including steady purchasing power and more assurance for both consumers and businesses. But there's a chance that discouragement from investing and spending might do serious damage to the economy and hinder growth. Economists disagree on the optimal level of inflation, in the end. In order to strike a compromise between the advantages of price stability and the requirement for flexibility in managing economic development and employment, many central banks aim for a low, stable inflation rate (often around 2%). Although there may be certain benefits to a zero-inflation economy, there are also possible concerns that need to be carefully considered.

CONCLUSION: It is crucial to comprehend the effects of a deflationary economy since this knowledge can guide decisions about monetary policy and general economic management. Understanding the possible effects of a no-inflation environment can help anyone making complicated economic decisions, be they policymakers, business owners or individuals.