Why do we have inflation

Inflation - auxmoney financial lexicon

Politically inflation is wanted

The state definitely wants inflation - as long as it doesn't get too high. What doesn't look clever at first glance makes perfect sense on closer inspection. Some states want to use it to reduce national debts, the real value of which falls when the money supply increases - the absolute debt value is not affected by inflation, regardless of whether the money supply in circulation is significantly larger (or smaller). With more money in circulation, the debt is correspondingly easier to pay because a currency unit has less purchasing power. As a result, creditors have to accept monetary devaluations, so that this thinking is regarded as an emergency measure if the debt burden of a state threatens to crush its budget; this happened, for example, in Italy in the second half of the 20th century. In Germany there is currently an inflation rate of 1.5 percent (as of 07/17), which is significantly less than ideal.

The reason for this is the fear of deflation. The opposite of inflation, deflation, means a tightening of the money supply. This results in a very negative development of the economy: in the expectation that prices will fall, people would spend as little money as possible. Companies would make much less turnover, which would shrink the economy by many percent accordingly. Combined with the shrinking economic growth, the general standard of living would also fall. This is politically undesirable, so inflation is accepted as the lesser of two evils. For example, there were serious problems with deflation in Japan in the 1990s.