Modest

inflation—in the 2 to 4 percent per-year range—is seen as a good

thing. Why? Because it’s better than the opposite: deflation (see #19 Deflation).
Moderate and predictable inflation is thought to help avoid recessions and
sharper business cycle reversals. Inflation also helps borrowers, for the dollars
they will use to pay back debts will be worth less in the future, thus easier to
come by, as most debts do not get larger with inflation.
It’s interesting to note that inflation and deflation once occurred in sharp and
unpredictable cycles. More recently, central bank intervention has moderated
those cycles, and has avoided deflation altogether, at least in the United States,
since the Great Depression. The moderate and steady inflation rates enjoyed
particularly since the oil shocks of the 1970s have created a favorable business
climate. See Figure 3.1 for a long history of inflation rates. (It should be noted
that this chart is the same as presented in the first edition and only takes us
through 2006, but the 356 years before that remain instructive)

Figure 3.1 U.S. Historical Inflation Rate

Source: Wikipedia
Data Source: John J. McCusker, How Much Is That in Real Money?: A Historical Commodity
Price Index for Use as a Deflator of Money Values in the Economy of the United States, American
Antiquarian Society, 2001; Consumer Price Index (from 2001 forward)

Why You Should Care

Inflation can be one of the biggest enemies to your finances and financial