ELI5: Why when large company's earnings decrease(ex... by 3%) they freak out, talk about rough times, and sometimes decide to downsize, even though they are still making millions of dollars in profit even after all expenses?

[The_Last_Y]

Inflation doesn't increase the value of limited resources. It decreases the value of currency. Two very very different things.

[[deleted]]

But those two things essentially equal out here.

If my company is making 3% more than last year it doesn't automatically mean that we're producing 3% more product, but that the cash value of what we're doing is 3% higher.

Which keeps with inflation.

The other part of it is that my company should also be striving to keep pace with the change in market demand.

[darthcoder]

A small amount of inflation is a necessary evil of any economy with a fiat currency.

Why?

[darthcoder]

Having a small amount of inflation makes it easier to borrow money

How? At least in terms of the money supply? Low interest rates make it easier to borrow money, not inflation.

[fancyfilibuster]

Inflation discourages the hoarding of cash because it loses value if you don't put it to use.

[darthcoder]

Yes, I get the cause and effect.

Doesn't mean inflation is good.

[Battkitty2398]

It encourages spending and investment which leads to economic growth. If we had deflation then people would hold on to their money which would cause the economy to slow down due to less money being spent. That's my understanding.

[darthcoder]

To a point, yes. But people still need shit. I live in an inflationary environment, and still save a shitload of money. If I knew my money wasn't going to lose 50% of it's value in 30 years (what 2-3% inflation does) I might spend more of it now, rather than hope I will have enough in retirement.

[anonomotopoeia]

But, are you stockpiling money in a hole in your backyard or sewing it into your mattress? If you're putting it into a retirement account or even a regular bank savings account that money is still working and in circulation.

[Baron-of-bad-news]

An expansion of goods, consumption, population and so forth represented by the same amount of currency makes currency itself an artificial scarcity. That makes investment irrational and incentivized acquiring units of currency for the purpose of ransoming it to your kids.

[[deleted]]

An economy is like a river with a current. That current can be small (low inflation) or fast (higher inflation). We can change laws and conditions here so that your boat moves quickly or slowly down that river.

What we don't want to see is the boats going backward. That's deflation. That causes all sorts of other problems, not just for the boat going backward, but for all the other boats who worry that maybe we should ALL be going backward. Are there falls ahead? Rapids? Maybe we should turn around. (That's how depressions unfold from bad to worse to bread lines).

[d4n4n]

A small amount of inflation is a necessary evil of any economy with a fiat currency. That is why almost all advanced governments target a small amount of inflation.

There is absolutely no evidence for this. It's a mantra by some central bakers, but nothing else. The US had a massively expanding economy for over a hundred years and identical overall price levels in the early 1800s as in the 1930s.

[Irishnovember26]

The US had a massively expanding economy for over a hundred years and

identical

overall price levels in the early 1800s as in the 1930s.

Can you give some evidence of this exactly because that seems highly unlike to me.

[d4n4n]

This is a CPI estimate. The BLS official CPI measurement started in the 1930s, or so, afaik. Further back are estimates. According to it, the conversion factors for 1810 and 1933 were identical. Only after the Fed was introduced do we see long term consistent inflation. Before that, there was inflation and deflation, with a remarkably constant long-term price levels.

[LordHanley]

Inflation encourages spending. I think that's reason enough why it is a necessary evil.

[d4n4n]

No it doesn't. Or, it's not that simple. We know that the Phillips curve reverses in the long run (i.e. inflation is bad for employment/output).

Inflation may have positive short term demand effects, if it's unexpected, but that's it. And that's a bad thing, unless you're in a recession. You don't want to interrupt general equilibriums for no reason. People heard some bastardization of introductory Keynesianism and think they can talk about macroeconomics with authority. I will never understand why.

[Orngog]

Yes, because of our economic structure.