This topic is probably well known to people with an understanding of economics, but that isn’t most people so I decided I wanted to write about it. With most of the Western world experiencing sky-high inflation these days, people are wondering when prices will ever come down. A reduction in prices would be an example of deflation, and the Fed has for years been working tirelessly against that, which might make some people wonder “why wouldn’t it be a good thing if prices went down?”

To begin with, technology is supposed to be deflationary and in this case it’s seen as a good thing as it allows the economy to grow faster and people to afford more things. However while deflation is expected in certain sectors, the economy as a whole should not be deflationary as it can pervert the market forces which lead to growth. In a deflationary environment, money gains value as time goes on and this means the rich get richer just by holding money, they don’t even have to invest it. Not only that but loans are very expensive because the value of money keeps going up. Both of these facts discourage investment and encourage sitting on wealth instead, which decreases economic growth and productivity.

This is often cited as to why despite its use throughout human history, a gold standard is not appropriate for a modern economy. A gold standard would ensure that money can only be created through mining more gold, and since the economy is expected to continue growing as more people join the workforce and more technology is rolled out, this would by necessity induce deflation. Deflation would then discourage investment and encourage hording, hindering economic growth and ossifying social mobility as old money becomes unassailable by new money.

For all these reasons most central banks have an inflation target of around 2%, let’s all hope they manage to get inflation in line.