Of primary importance is the recognition that inflation is not an unnatural mechanism for a country’s economy. Certainly, from a point of view of an ordinary citizens who pays taxes and give their private money for goods, it may seem that the absence of of pre-election inflation or even deflation are good strategies to curb economic dynamics, and this is something to strive for, yet such an approach can cause problems.
First of all, this problem concerns the consumer opportunities of citizens. If the Federal Reserve does not manipulate price changes–when inflation is at the zero level–the buyer has fewer incentives to consume. This means that total consumer spending is reduced because because there is change in the private offers. A citizen can give up savings and interest deposits. The second consequence of zero inflation is a readiness in demand for goods and services of the U.S. economy; which creates a disproportion between supply and demand. In this case, the company should have increased its production capacity, but with zero inflation , it is problematic. Companies will not be able to afford to hire new employees, and it will be necessary to re-evaluate existing HRs in a stable price environment. Thus, the company’s management will have to cut salaries or terminate some of its employees.
Another consequence of maintaining inflation at zero percent will be reducing real interest rates by the Central Bank. In theory, the real interest rate is defined as the nominal minus the inflation rate, but if inflation is zero, it means that the actual debt burden increases. This is especially dangerous if there is already a large accumulated level of debt in the economy. Furthermore, with zero inflation, the dollar is “cheapening”, which will eventually increase the real value of national currencies. However, it should be recognized most multinational companies are oriented towards the U.S. dollars and the growth of national currencies is unlikely to be positive news for them.