Inflation - Will prices of goods continue to monotonically increase in the long run?

Question

The question primarily is based on the presumption that Governments would ideally want to maintain a small inflationary environment. In that case, are we really talking about a future where groceries that retail at $X a pound today could retail at $(10*X) or more a pound a few decades from now? If that's true, wouldn't the purchasing power of money continue to decrease over time?

Are we also going to tell our grand children, just as we heard from our grand parents, that things were so damn cheap in our times.

I am curious to understand when and how this monotonic rise in the long-run could possibly end? I would like to believe that a monotonic increase of anything is not sustainable. Are we relying on intermittent recessions to bring the prices down?

Answer 1

It seems from the Bernanke and pundits in general that there's an ideal inflation rate and it's not zero. When you reference that recessions bring prices down, I think I understand you, but recession does not mean deflation. In fact deflation is a rarity, not a common occurrence.

When you look at what compounding does, you see that a 3% inflation rate will double the cost of an item in 24 years. From 1975 to 2010, inflation was 4X as it ran well above 3% for a time. I chose that date as I was 13 at the time, and wasn't too aware of specific prices before that. So I've seen a pizza go from $3 to $12 during my life. I hope to live long enough to see it double again.

I think that it's hyperinflation that's an ongoing concern, but the controlled inflation as I just described is not detrimental, in fact it's preferable in some sense. For example, when I look at my 5% mortgage, it's 3.6% after tax, but with a 3% inflation rate, my cost is really .6%, as the remaining debt devalues over time and the house (in theory) goes up with inflation. On the other extreme, higher inflation, say 8%, starts to be detrimental, distorting spending behavior and bad for the system.

Answer 2

You can't really avoid inflation. As the population grows, the amount of money needed will grow as well (because the people will grow up and go to work and earn money, and someone has to create it to pay them). One of the definitions of inflation is increasing amount of money.

Increasing amount of money causes devaluation (for example, if instead of 1000 dollars we now have 2000 dollars in circulation, because the population tripled in the last 50 years, while in Russia the population remained the same and they have the same 1000 rubles as they had 50 years ago - 1 ruble will no longer cost 1 dollar, but rather 2, i.e.: prices rise).

This is very simplified of course, and there are a lot of causes and triggers for inflation. Inflation, when controlled and within certain limits is necessary for growth, as mentioned, but when uncontrolled and very high it causes a lot of damage, and that's what troubles people about inflation, not its mere existence.

As to bringing the prices down- the prices don't go down, the gallon of gas will not go back to $0.25. It's just the buying power of the money goes down, because of inflation. You could buy a gallon of gas for 0.25 50 years ago, but you had to work for 1/2 hour to earn these 0.25. Now you have to pay $4, but if you still need to work for 1/2 hour for that, then the price didn't rise, effectively.

Answer 3

Since most developed countries view a low but positive inflation rate as ideal, it is very likely that we will end up with positive inflation. However, modern societies such as Japan have experienced extraordinarily long periods of deflation. In their case, however, it is mostly due to a political unwillingness to impose the costs on savers, as savers are politically in control.

As to your point about things being so much cheaper in our grandparents' days, this is actually completely untrue for the vast majority of goods when measured in real terms (e.g., relative to the median workers' wages). Today a decent bicycle can be bought with the average worker's earnings over a few days, whereas our grandparents would have had to work over a month. A modern radio can be bought for perhaps an hours' worth of work ($10 on amazon.com), but our grandparents may have had to spend months working to buy their first radio. There is no reason for this trend not to continue.

Point is, inflation is not such a bad thing so long as wage growth keeps up or exceeds it.

Answer 4

The history of the last 100 years has demonstrated that inflation need not be a straight-line advance in price across the board. New technology has delivered productivity gains which have in many cases compensated for inflation.

Keep in mind that price changes may be inflationary, but may not attributable to inflation. For example, the massive swing upward in gasoline prices had more to do with the market, specifically Chinese demand for gas than inflation. But increased fuel costs trickle into the prices of other commodities that we need to buy as well!