“Inflation actually causes people not to spend”… could it be true?
Inflation can go up for a number of reasons. Boom times can cause inflation, as everyone is making and spending a lot of money, so prices and inflation goes up. In times like these central banks usually increase interest rates to curb spending and thus bring down inflation. By raising interest rates the central bank is increasing the cost of borrowing money. So with high prices and a higher cost to borrowing money, most people start reducing their spending. When this happens businesses sell less stock and have increased costs (due to higher interest rates) so have to lay off staff or reduce their hours at work, so people will have even less money to spend. This causes prices to fall and reduces inflation and can result in a recession. At this point in time central banks start reducing interest rates to make the cost of borrowing money cheaper and stimulate people to start spending again. And so the cycle continues. The result in this case is that inflation itself didn't kerb demand, but was helped along by the central bank rising interest rates. Another reason causing inflation can be a restriction on the supply of certain goods or services. An example we went through about 2 years ago was when floods caused banana crops up in Northern Australia to be devastated. This caused a lack of supply in bananas for almost a year across Australia. The normal price for bananas here is between $1 to $3 per kg. During this period banana prices skyrocketed up to $14 per kg. The result: very few were buying bananas. So the increase in price here caused a reduction in demand directly. Not always. You always consider economic factors in conjunction with each other rather than in isolation, which leads to weird assumptions. People spending isn't what you should look at always. When inflation is high, means government is spending. Government is spending on public projects, creating employment, increasing salaries, doling out loans. So you are putting money into the economy and into people's hands. Everybody will be spending, so it will also drive demand(Demand Pull inflation). But there are differences among economists regarding Cost push inflation, which is a dangerous phenomena. At the same time the interest rates, which are a monetary tool for central banks to increase(decrease) the money flow in the economy, are low. Under low interest rate conditions, businesses take loans to invest in projects. Because interest rates are low, people find it logical to spend now than spend later. As interest rates are low, there is an expectation that they cannot earn more in savings than investing in products which will generate benefits in the near term. These all goes on in cycles and after a period of inflation, you will see government taking action to rein in inflation. It will increase interest rates to suck money out of the economy. This is when people will curb spending, because they know they will earn a higher return while saving rather than investing. We need to be careful what we are talking about here. Inflation on a economy-level scale at an expected rate will not change consumer habits because the price increase is manageable. You have to realize that prices are not increasing in isolation: wages will have to rise along too.  High inflation that is expected will increase consumption of durable goods, as people attempt to 'get rid of their money' before the price changes on them. A good example of this was post-WWI germany, where hyperinflation was so bad that offices began to pay their employees twice daily, so they could adjust their wages, and so that their employees could go out during lunch and after work to buy something with the money before the price changed on them. Unexpected inflation may cause a temporary dip in spending until wages adjust, however consumers still need to buy, so they will likely push for higher wages, leading to consumption to stay about level. There is another effect to inflation as well: People who have savings will have their savings eroded over time if the economy is inflationary. To preserve their wealth, they will invest it. In a deflationary environment, money will increase in value simply by being hoarded, so they will be less willing to invest it. Deflation also increases the cost of interest on a loan, while inflation decreases it. So the overall effect is for an increase in spending under inflation, and a decrease under deflation. The person you have quoted is quite wrong. Price increases in a particular sector will cause consumer spending to decrease but this is a bad example, as it is not inflation, but rather a supply/demand problem of a particular consumer good. They are applying a micro-economic model (price increases of a single good) to a macroeconomic problem (price increases in the entire economy) when price increases at a global scale have the opposite effects. A good theoretical test of this is: what would happen if everyone in the US suddenly had twice as much money? (Ignoring international trade, of course). The answer: prices will double, and nothing else will change. The reason is, people will have more money to spend, but will require more money for their services, so in the end it all cancels out.
&gt; At the end of the day, that stockpiled wealth is still wealth we don't have that the Japanese people can rely upon  At the end of the day, the pile of real goods they worked to send us is real wealth we have that they don't. Bearing in mind that their stockpile of dollars isn't a constraint on the *issuer* of the dollar.  &gt;I'm saying let's actually figure out a method for determining our constraints scientifically in real time, and adapt our policy accordingly!  Sounds good. Going back a ways in the thread, the indicators you want to look at are employment, output and inflation. Slack employment &amp; output with low inflation indicate not enough spending, full employment with little to no output gap and stable prices tells you you have it right and rising inflation tells you it's too high.  To a great degree, finding the mark takes care of itself when fiscal policy is built around strong automatic stabilizers, spending that is counter-cyclical by design. "Salaries normally shouldn't fluctuate with inflation and deflation... Inflation prevents consumers from spending (prices get too high), ultimately taking money out of circulation. This causes the market to go in to deflation (or at least deflate back to normal). That's when people begin to spend again, and start the cycle all over again. Now... Imagine if salaries increased with inflation... Inflation would never end. Everyone could keep affording the high prices. A Starbucks coffee would eventually cost $150, but the ""middle-class"" would all be millionaires. Your ""small-change"" would consist of a wad of useless bills, and the government would have to continually print out more money just to keep up. NOTE: This is not a direct answer to ""where goes delta?"", but would more be directed to the part ""Prices go up and salary doesn't""." "One key to trading is recognizing expectations.  What you see in the market is not always a reflection of fundamentals; sometimes, it's a reflection of what people expect to occur, whether that actually happens or not, is debatable. When a currency experiences inflation, such as the CPI being higher today for the USD, it may see an increase because people expect that the central bank will raise rates.  Again, this may not be the case, and the traders with this expectation could be wrong.  If you're seeing a currency rise after reported inflation, more than likely, traders expect the inflation to benefit the currency in the longer run. Finally on the economics' side, and economists here can debate this, at least in the past the view was that there was a relationship between inflation and unemployment (see the Phillip's Curve).  This idea, depending on who you ask, was refuted in the 70s when we had both high inflation and high unemployment (stagflation).  Supposedly, if we have high unemployment, we should have low inflation, so we can always raise inflation to have low unemployment.  Note that you will still find some economists who think the Phillip's Curve is true, so ""refuted"" depends on who you ask. From what I've read, Austrian economists are the only economists who see inflation as always bad (long story short, I think it's Paul Cwik who argues that deflation is actually good); like you're seeing, other economists might see it as a good sign and it's only a concern when it's very high (hyperinflation)." "Inflation as defined in the general, has many impacts at a personal level. For example, you say that the reduction in the price of oil has no impact on you.  That's absolutely not true, unless you're a hermit living off of the land.  Every box or can or jar of food you buy off the shelf of the grocery store has the price of oil baked into it, because it had to get there somehow.  High fuel costs for trucks mean increased costs to put food on shelves, which mean increased prices for that food. Even tobacco prices can affect you, because they affect what other people are spending.  Demand is always a significant factor in prices, particularly retail prices, and if people are spending more money on tobacco, they're probably spending less on other things - either buying less snacks, for example, or buying cheaper brands of those snacks.  So the price of Doritos may drop a bit (or not rise), for example. General inflation also tends to drive raises, particularly in industries with relatively small performance ties to raises.  If inflation is 3%, wages need to raise 3% or so in order to keep up, on average; even if your personal cost-of-living went up 0%, or 5%, or 10%, the default wage inflation will be closer to that of the national average.  Any raise less than national average is effectively a pay cut (which is one reason why inflation is needed in a healthy economy).  So your company probably has a cost-of-living raise everyone gets that's a bit less than inflation, and then good performers get a bump up to a bit more than inflation.  You can read more on this topic for a more in-depth explanation. Finally, inflation rates tend to be major factors in stock market movement.  Inflation that is too high, or too low, can lead to higher volatility; inflation that is ""right"" can lead to higher stability.  An economy that has consistently ""right"" inflation (around 2-3% typically) will tend to have more stable stock market in general, and thus more reliable returns from that market.  There are many other factors that lead to stock markets rising and falling, but inflation is one very relevant one, particularly if it's not in the ""right"" zone." "This is the best tl;dr I could make, [original](https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2017/advanced-economicsciences2017.pdf) reduced by 99%. (I'm a bot) ***** &gt; Implications of mental accounting Following Thaler (1985), a large amount of work by Thaler and by others has explored and documented the consequences of mental accounting.  &gt; Real-world examples of commitment devices include the &amp;quot;Christmas Clubs&amp;quot; mentioned by Strotz (1956) and Thaler (1981), where individuals commit to saving for Christmas; the drugs Xenical or Antabuse (that makes you sick if you drink alcohol); and commonly used rules of thumb like &amp;quot;Do not shop when you are hungry&amp;quot; or &amp;quot;Do not keep alcohol at home.&amp;quot; 3.2 The planner-doer model Motivated by the observed deviations from exponential discounting, Thaler and his collaborator Hersh Shefrin proposed the planner-doer model (Thaler and Shefrin 1981, Shefrin and Thaler 1988).  &gt; Together with Kahneman and Knetsch, Thaler also invented novel experiments and uncovered three important manifestations of fairness preferences in interactions between individuals: first, some individuals will behave fairly towards others even in anonymous settings without reputational concerns; second, some individuals are willing to forego resources to punish individuals that behaved unfairly towards them; and third, some individuals are willing to forego resources to punish unfair behavior and norm violations even if the unfair behavior was directed towards someone else.   ***** [**Extended Summary**](http://np.reddit.com/r/autotldr/comments/75882u/richard_thaler_wins_2017_nobel_prize_advanced/) | [FAQ](http://np.reddit.com/r/autotldr/comments/31b9fm/faq_autotldr_bot/ ""Version 1.65, ~224768 tl;drs so far."") | [Feedback](http://np.reddit.com/message/compose?to=%23autotldr ""PM's and comments are monitored, constructive feedback is welcome."") | *Top* *keywords*: **THALER**^#1 **price**^#2 **individual**^#3 **Economic**^#4 **model**^#5" Yeah they must just be fanatics. I mean it's not like the Fed actually *targets* inflation, or *tries* to create it, you know as if Bernanke actually mentioned those things in speeches...  Oh, wait... he has.  Damn facts... they get in the way of Keynesian dogma every damned time. It's not just that they are not spending; there is too much capital concentrated on the top of the high net worth set to find anyone to invest. All the investment in the world can't do anything but create supply. Supply is worthless without demand. Without a consumer base with disposable income, there is not enough demand to create anything other than lackluster growth. Supply side economics continues to exacerbate income inequality, crippling demand and thereby limiting investment opportunity. Thus, the richest have nowhere to put their mountains of capital, so it sits in govt bonds, holding rates down, or goes into various other value stores. It's not being invested or spent, but it is being removed from activity, and it certainly is not trickling down into the millions suffering under increasing prices and stagnant wages. As wealth inequality grows, the entire economy suffers. The other detrimental effect of this is the creation of market bubbles to feed the appetite of this capital glut for better returns. Bubbles aren't growth or healthy investment; they are widespread economic disasters in the making.   Redistribution of wealth, however accomplished, is the only solution to this problem. This is not a moral question. It's economics and math. Are you trying to get someone to do your homework for you?  This question has been answered repeatedly in the negative by everyone who actually studies the economy.  Read Mundell-Flemming model, and learn this stuff.  You can see why currency regimes like the Euro make sense from a theoretical stand point, but where flexible exchange rates are a welcome release valve for pressures.  You obviously have never studied economics. Hyper inflation doesn't happen becuase of floating exhange rates.  Hyperinflation happens when people lose faith in the governing body, regardless of who that is.  You think political regimes won't change just because there is one currency?  No, they will still spent 1.05 for every dollar they bring in taxes.  Hyperinflation is not a problem of floating exchange rates, it doesn't follow from any causal relationship.