The Inflation Myth

You’ll hear economists say it regularly: a small, stable level of inflation — around 2% — is healthy. It encourages spending, discourages hoarding, and keeps the economy moving.

There’s some truth in this. If people expect prices to rise, they have an incentive to buy now rather than wait indefinitely. A mild inflation target gives central banks room to cut interest rates during recessions without hitting zero. These are real arguments, made by serious people.

But the framing conveniently leaves some things out.

First, 2% inflation is not neutral for savers. At 2%, your purchasing power halves in 36 years. Over a working lifetime, a person who saves carefully in cash watches half their savings disappear — not through any mistake of their own, but through design. That 2% target is a policy choice made by institutions that don’t bear the cost.

Second, inflation targets are floors, not ceilings. Governments and central banks benefit from mild inflation — it erodes their debts in real terms. The institutional incentive is to let inflation run a little hot, not a little cold. The past few years have demonstrated this vividly.

Third, the 2% figure is a recent invention. For most of monetary history, stable money — not constantly devaluing money — was the standard. The assumption that perpetual inflation is necessary and natural is not a law of economics. It’s a preference that happens to benefit large borrowers.

A little inflation may be manageable. But it’s worth knowing who decided what little means — and who pays for it.

Tomorrow: a true story of what happens when a little becomes a lot.

— The Daily Bit