One of the recurring themes you see in debates over monetary policy is the idea that inflation is a moral issue. People will often point out indignantly that today’s dollar is worth only five percent of what dollars were worth a century ago. Inflation hawks sometimes describe inflation as a kind of theft.
Clearly, really high levels of inflation have devastating economic consequences, as Weimar Germany and modern-day Zimbabwe have discovered. But so long as inflation is kept at the moderate, largely single-digit levels Western democracies have seen in recent decades, moralizing about inflation simply doesn’t make sense. There’s no particular reason to prefer an inflation rate of 0 to a 2 percent or 4 percent inflation rate, and indeed, the latter may have important advantages.
Economists like to say that money serves two primary purposes: it serves as a medium of exchange and a store of value (many also describe it as a unit of account, but this is largely a consequence of the other two functions). Inflation—even in the single digits—prevents money from working effectively as a long-term store of value. If you were born in 1920 and your retirement plan was to put $100 bills under your mattress, the inflation of the 1970s would have destroyed the majority of the value of your savings.
The problem with this line of argument is that even stable money is a bad long-term store of value. That’s because modern capital markets offer you the opportunity to not just preserve the value of your money but dramatically increase it by investing in productive assets. You can buy stocks, bonds, or real estate, all of which generate a stream of income that increases the value of your investment.
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