Is zero inflation a good thing?

Answer 1

InflationYes and no, and here's why:

Inflation is not a good thing because it slows down economic growth.

For example, when inflation is high, things cost more and people spend less. They also do less long-term planning that involves spending money, such as building houses and investing. Businesses are affected in the same ways. When inflation is high, it tends to fluctuate quite a bit. This uncertainty makes people wary of spending money for fear that inflation will increase even more and they won't be able to pay their bills.

High inflation also adds additional costs to long-term interest rates. These costs are to offset the risk associated with inflation. The additional costs make borrowing money less attractive. When people don't buy things (when demand is down), then the supply of goods gets too high, production has to decrease, and unemployment increases -- in other words, recession hits.

Inflation is a good thing because:

It allows the government to lower real interest rates below zero and stimulate demand and prevent any sort of "liquidity trap" arising. This has occured in Japan recently and has resulted in nominal interest rate dropping all the way to zero (for macroeconomists the interest elasticity of money demand is infinite and the MD and LM are perfectly elastic - consumers are indifferent to bonds or money since the opportunity cost of either are the same i.e. zero)

It is very important to have some inflation such that firms can cut wages more easily - they can do so by increasing the nominal wage at a rate slower than the growth in prices i.e. inflation.

Inflation may also be the by-product of a huge debt-to-GDP that the govt has run up over the years - and the only way to fund such a debt is to print money. This "seignorage" is common in less economically devoloped countries where no country is willing to lend to them in any case.