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A Discussion Regarding Inflation


  • Inflation is a general, sustained upward movement of prices for goods and services in an economy.
  • People have a time preference regarding money because money later is worth less than money now; there is an opportunity cost to waiting for money. If you get money later, you lose purchasing power today.
  • If people are going to accept the risk of inflation (or even default!), they must be compensated with interest. The purpose of interest payments on savings or on loans is to cover losses in purchasing power due to inflation and to reward the saver or lender for forgoing current spending. Interest also rewards the lender for taking a chance on lending money that might not be returned.