Why can’t prices just stay the same?

inflation is causing stress bad news about prices in the grocery store historically High inflation in 2022 much of the world experienced a period of uncommonly high inflation with the US UK and Euro Zone all peaking at around 10% meeting that prices on average were a full 10% higher than one year before though that's probably not a surprise to anyone watching this it's thankfully now closer to the normal range if still a bit high but infuriatingly since this chart just shows a rate of change that doesn't mean that prices are down just that they've stopped climbing

as fast and that really sucks consumers are stressed businesses are suffering and governments are scrambling but at the same time if you were to I don't know find yourself reading and watching a ton of inflation related content you'll also keep hearing this a little inflation is a good thing a little inflation is a good thing a little inflation now would be a good thing everybody wants a little inflation why if Rising prices hurt seemingly everyone why can't they just stay the same why can't inflation be [Music] zero the first reason inflation can't stay at zero

is because governments and their central banks don't want it to lots of countries actively pursue what is called an inflation Target in the US right now it's about 2% that's the number that's used by most central banks across the world but the truth of it is that's a pretty arbit number the goal is what economists consider a virtuous cycle here's what that looks like in times when prices are generally Rising people tend to expect them to rise further and that actually encourages people to spend money now on big durable purchases like cars or appliances in

order to avoid having to pay more for the same thing later and the stuff we need to buy no matter what goods like food or clothing gets more expensive too which requires us to spend more either way companies make more money which means more people have jobs and more of their own money to spend and that means more demand and therefore higher prices so the cycle continues but this bit of the cycle is crucial to its virtue it's okay if prices rise so long as wages rise too you'll still be able to afford the same

Goods if your wages keep Pace with inflation emphasis on the if in the US for 2 years wage growth lagged behind inflation that trend has reversed starting in mid 2023 wages especially at the bottom has kept up with inflation in fact in many cases surpassed inflation and that is a good thing that also we have to remember wages in this country are rock bottom and have been for way way too long right so wage growth Rising good are wages high enough no and A disruption at any point in this Loop can lead to the kind

of high inflation we've experienced over the past few years when supply chain interruptions created product shortages and some companies artificially drove up prices to increase their profits which along with with some other causes effectively turn this virtuous cycle into a vicious one with Digital Credit Union you'll get a world of financial possibilities starting with their award-winning primary savings account and a zero fee checking account that could help you get your paycheck up to 2 days early like all credit unions DCU is a not for-profit which says its primary focus is to serve their members unlike

Banks which primarily serve their shareholders from Community giveback initiatives to Innovative products and services their mission adheres to these three principles people come first do the right thing and make a difference DCU does not influence the editorial process of our videos but they do help make videos like this [Music] possible the government does have tools to combat Rising inflation they usually shift things here by raising interest rates which makes all borrowing including credit cards and bank loans more expensive when a cost of borrowing goes up it becomes more expensive to make investments to hire people

and that eventually slows the economy down that's what the US Federal Reserve did in 2022 which did help bring inflation closer to that 2% Target while placing an even higher Financial strain on families who may need to borrow just to make ends meet when the FED uses interest rates to bring down inflation what they're doing is tamping down that Demand right they're telling people you can't have a job like let's put you out of work so that demand slows that you know price growth slows the FED raises interest rates to slow down spending across the

economy partly by signaling to markets that they're taking the problem seriously which creates an expectation that inflation will fall but we also have to talk about what happens when prices fall instead of Rise that's called deflation and falling prices honestly sounds pretty good but they can also introduce another kind of cycle a deflationary spiral when prices fall consumers May hold off on making big purchases hoping for even lower prices in the future and the stuff we need costs less so we just spend less in general if people are spending less companies make less they start

to cut costs and ultimately they lay off employees unemployed people spend less and even the people who are employed might choose to save more to saave off Financial loss so prices go down even further as demand goes down so ultimately all of that adds up to slower economic growth as a whole which is really hard to fix because governments don't have the same ability to respond to deflation as they do to inflation look at this chart again the last time inflation dipped below 2% in Spring of 2020 the US brought interest rates all the way

down to 05% and after bottoming out for a bit that seemed to work inflation inched back up but if inflation hadn't come back up the government would have had limited options their rates were already getting almost out zero and then things could get dicey historically periods of true deflation are pretty rare but when they do happen it seems that fixing them requires a pretty serious shock to the economy the Great Depression was in part a deflationary spiral solved only by the outbreak of World War II when the government supercharged spending and employment and Japan is

finally emerging from Decades of chronic deflation but that's thanks in no small part to the high inflation that most of the world battled over the last few years you don't want to rely on those kinds of things if inflation goes below zero it is hard to fix the cost of deflation is really high and that's something that we want to avoid this is where inflation targets come in let's look at this chart again these lines are pretty shaky because there are a lot of really complicated factors that affect inflation the macroeconomy is made up of

the decisions of millions of people of millions of businesses the way those decisions interact I mean try thinking about how to map everything out and it's just it's it's mindblowing right inflation will always fluctuate even if it's just a little and this is the last big reason why they don't want inflation to be 0% if inflation sits here that basic shakiness is constantly at risk of dropping down into the deflation Zone triggering the bad cycle and the way to prevent that is to have it sit just a little bit higher so a little inflation is

usually a good thing yeah that's annoying [Music]