Why cant inflation be 0%?

The problem is that due to economic and population growth, the money supply needs to grow by some amount every year.

Population growth is pretty easy to project, but economic growth is much harder. After you take population changes into account, if you project the economy will grow by 4% next year, you need the money supply to grow by that amount.

If the economy only grows 2%, then you've got 2% "extra" growth in the money supply, and you'll have inflation. But if the money supply grows _less_ than economic growth (say you project 2% and it grows 4%) then you have deflation.

Small amounts of inflation are much less damaging to an economy than the same rate of deflation, because deflation causes people to not spend money (after all, if you're looking to buy a $30,000 car this year, why wouldn't you wait if you could if you knew that next year, thanks to deflation, it would only cost you $28,000?).

150 years ago, people in general had much less disposable income, and that limited the damage deflation could do. You _have_ to buy food every week (unless you grow your own), and you have certain things where demand is going to be basically constant unless the economy does something horrific. Now, though, we have money to spend on things like cars and a new Xbox, and that money doesn't tend to get spent in deflationary cycles. Not spending money slows the economy

Since a small amount of inflation is less damaging than the same rate of deflation, the people who set monetary policy tend to bias their plans to produce a small amount of inflation.

Edit for additional info: Yes, they would buy one if they absolutely had to, but if they have the option of waiting, enough people will do it that it cripples the economy--and the higher the rate of deflation, the more people make that choice.

And 40 years ago was a very different time (I know--I was growing up). The average single family house was about 1400 square feet--now it's twice that. If nothing changed but the size of the average house, that would go a long way to explaining the difference.

Also, there are a lot of things that are "essential" now that just didn't exist, so people didn't spend their money on them.

There was no cable or satellite TV. You bought a TV, plugged in an antenna (a rooftop model if you wanted to get fancy), and then watched one of the three available channels.

No high speed internet. I'm paying about $150/month for that and the cable bill. No low speed internet, either

Cell phones didn't exist--it's really easy for a family to spend $100 month just on the cell phone bill.

No video games means no Xbox, no Wii, and no $40 games to play on them.

Cars are more expensive, but you're also getting a lot more car. The average car back then had an AM radio, no airconditioning, manual windows, was made of heavy, cheap steel, and the safety features were seat belts. And it sucked gas at a rate comparable to a bulldozer. Now, your car has about 47 airbags, radio/CD/mp3 player, air conditioning and power windows, is made of lighter, stronger materials, and gets about twice the gas mileage.

Also, people are a lot more willing to go into debt than they used to be. Growing up, people didn't whip out the credit card to pay for Christmas presents, and where you went on vacation depended on how much money you had saved up. All that credit card debt has to be paid for, and the interest is a killer.

The point I'm trying to make is that it's a very different world now than it was back then, so you can't just say "40 years ago a one income family could buy a house, now it's tough with 2, so something must be wrong". It's more complicated than that.

With your additional comment you are confusing two ideas.

First, a 0% inflation rate is difficult to do under any monetary regime. There is a lot of pressure for inflation in the system and a lot of fear of deflation.

The problem is that you need to maintain the supply per person adjusted for changes in per person productivity. Any idea how many people, tourists included, happen to be in the United States today. How about tomorrow? How about in New York? You need the right amount of money in each city every day (on average) adjusting for productivity changes. Is your town lazy today compared to yesterday?

Mostly the system can ignore these practical realities by allowing price information to solve the problem for them, but that is one step removed from the data, so you have to work with estimates. If you over shoot, just a little, nothing bad happens. If you undershoot enough to be in deflation then banks have to make loans at negative interest rates. Go to the bank and ask them to loan you money and pay you for the privilege of borrowing. Think about what a world like that would really be like.

As to one earner versus two earners, that has nothing to do with inflation.

Yes,it is possible.But it is very rare.Because it will be a very huge pressure on the central bank to increase money supply.Japan is a country which has set the inflation target rate very low as 1%. I do understand that why the political situation is unbearable over there.

This question has been asked several times on the forum.....you can search all other answers.

However, the government you mention...won't bother about % inflation simply because with so much power in hand it can take many measures to reduce public suffering.

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