[Brainwalter]

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But remember, inflation applies to prices and wages. So a little inflation is a good thing, but too much is a very bad thing.

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No amount of inflation is ever a good thing. Inflation only doesn't affect you if you spend your wages immediately, or get paid with some other good (kinda the same thing).

If, however, you want to save some money (which is perfectly rational), then any amount of inflation is a bad thing.

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Let me put it another way...inflation is a byproduct of a healthy economy where people are trading money for goods and services, and they are receiving interest payments for their deposits. It indicates that people are, on average, making more money which buys fewer goods, and businesses are getting more money for their goods. They have faith in the economy, and prices and wages rise accordingly. A credit-based economy (like the U.S.) should have an inflationary bias.

Contrast that to deflation. Businesses are getting less money for their goods. As a result, they have to pay their workers less money, but they can afford more goods. Those businesses and workers have less access to money because they cannot afford to take on additional debt. They know that their debt payments right now may be manageable, but may become unmanageable in the future when their income levels drop and their payments remain constant.

As for banks, the real cost of funds (difference between interest rate and inflation rate) increases during a deflationary period. If the interest rate was 8%, and the inflation rate was - 3% (deflationary) then the real cost of funds would be 11%. Interest rates can only drop so much to compensate, and they can't go below zero.

ScottieK

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I'd rather have more goods than more money.

"A little inflation is a sign of a healthy economy" and its corrolary, "When the economy is TOO good inflation gets too high" are misleading results of Fed policies which attempt to pass off money-supply related growth as real economic growth. Think about it for a second, with a static money supply, and a strong real economy, which means increasing productivity, and more goods to go around per capita, prices must fall, not rise. Inflation is a purely monetary phenomenon.