Is inflation a normal thing over time?

Question

for exmaple: is that why things arent 25 cents like they were in the 50's?

are we really headed for a depression or just a recession?

Answer 1

The government tries to create a low level of inflation, around 2% per year.  And over many years this inflation adds up to a large amount.

Many economists believe that it's best to have some inflation as an insurance against possible deflation.  And deflation is something politicians and many economists fear.  Because deflation happened during the last Depression.

It's hard to say how bad the economy will get.  But I think this time the recession is going to be worse and longer than the last recession in 2001-2002.  Because about 70% of the US economy comes from consumer spending.  And US consumers are now in a lot more financial trouble than they've been in a long while.  Their debts are too big.  And the banks can't lend them any more money.  Because banks have lost a lot of money.  And now banks are looking to borrow money from people.

Answer 2

Well, if you're asking if inflation normally happens, that's obviously a yes.  But, if you're asking if it needs to happen, i.e., if it's necessary, the answer is no.  

I think that it will be only a recession.

Answer 3

Many questions :)

Is inflation a normal thing over time? No, inflation in the long run is caused by expanding the money supply faster than the production. The money supply, which is basically the total amount of dollars in the economy is controlled by the central bank (Federal Reserve). They alone have the power to create new money. The simplest way of creating money is by turning on the printing press.

Inflation is not something that occurs naturally, it happens because the central banks either allow it or cause it. When USA was on the gold standard in the 19th century, deflation (the opposite of inflation) happened frequently because the money supply relied on the production of gold and some years the gold supply didn't grow as fast as the need for a means of transaction did because of growing production. When there isn't enough means of transaction prices will drop.

Consider a desert island economy. You and your friend Anne meet every day to trade. There are 4 coins in the money supply, and you have two each. Every morning you buy milk from Anne for 2 coins and at noon she buys fish from you for 2 coins. Now one morning you both wake up to find you only have 1 coin each. This means the money supply has halved. Now you'll both have to cut your prices in half and charge 1 coin for fish or milk instead of 2 coins. This is an example of deflation.

Is that why things arent 25 cents like they were in the 50's? Yes it is.

Are we really headed for a depression or just a recession? According to the prediction markets at www.intrade.com, the market only thinks theres a 25 pct chance of USA going into a recession during 2008.

Before a depression there would be a period of recession. The indicators such as stocks, unemployment and real estate prices haven't been nearly as grim as during earlier economic depressions. With the lessons learned from the Great Depression of the 30s and the 70s recession the government and central banks should be better prepared to know what to do and perhaps more important what not to do.