Whether you’re scrolling through social media, attending political rallies or shopping at your local grocery store, you’re bound to hear the term “inflation” thrown around. Inflation measures the increase in prices of products and services over a period of time. When a country’s money supply expands too much in relation to its economy, the power of the currency weakens, resulting in higher prices. Currently, inflation has risen 2.9% over the past year, with many frustrated with their rising monthly costs.
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As a thought experiment, we asked ChatGPT what would happen if inflation dropped to 0% and how this would affect Americans across the board. Here’s what the AI chatbot said.
The Positives of 0% Inflation
There are obvious benefits that the average person would enjoy if inflation were to come to a standstill. These are four of the main advantages that ChatGPT highlighted.
Stable Prices
Chat GPT said, “Everyday life becomes more predictable. You can plan your expenses and savings more accurately because you know prices won’t go up next year.” This is a very convenient aspect of 0% inflation that most people think about first. Predictability makes budgeting and planning for your financial future much easier.
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No Erosion of Savings
People hope to earn money by putting it into a savings account. However, if the price of inflation rises higher than their interest rates, they’ll lose money.
With no inflation, ChatGPT said, “If you keep money in a savings account with a positive interest rate, you don’t lose purchasing power over time.” In other words, without inflation, your savings will only increase over time and become more valuable.
Lower Pressure on Wages
Another advantage is “[w]orkers might not need frequent pay raises just to maintain their standard of living.” This benefits both workers and employers. When prices don’t go up, employees can live comfortably and predictably with a consistent income. On the flipside, when employers don’t need to boost wages to keep up with inflation, it’s easier for them to budget for labor costs.
More Credibility for Central Banks
In some situations, high or unstable inflation causes people to lose faith in the financial policies of central banks. With nonexistent inflation, ChatGPT said, “If inflation had been high before, a drop to 0% could signal strong control over the economy, potentially boosting confidence.” This is important because a lack of trust in the central bank may lead to less investment and the general public turning to foreign currencies for stability.
The Negatives of 0% Inflation
At a glance, it might seem like a world without inflation would be perfect. However, there are some significant downsides that are important to understand.
Increased Risk of Deflation
ChatGPT’s first negative of an economy without inflation is, “0% inflation is dangerously close to deflation — when prices fall over time.”
On the surface, lower prices may sound good, but deflation can be a serious issue. When prices drop, so do salaries. Businesses also begin to lay off more employees to make up for a lack of profits. This can result in less consumer spending despite lower prices and weaken the economy.
Higher Real Debt Burden
Another downside has to do with fixed-rate debt. The AI chatbot said, “If wages stay flat and inflation is zero, people with fixed-interest loans (like mortgages or student loans) feel more burdened over time because they can’t ‘inflate away’ the debt.”
This means that when prices and wages rise due to inflation, your fixed-rate loan will actually cost less because its rate stays the same. Inflating away debt has been used by governments to drive down the value of their debt in the past, but often comes with its own set of issues.
Harder To Stimulate the Economy
ChatGPT said, “With 0% inflation, interest rates are likely very low — possibly near zero. This gives central banks less room to cut rates to stimulate spending or investment during a downturn.” When the central bank lowers rates, it’s cheaper to borrow money. When people can borrow money at an inexpensive rate, they’re more likely to spend and invest it. However, if banks can’t cut rates, people hold onto what they have and wait for a better time to invest.
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This article originally appeared on GOBankingRates.com: We Asked ChatGPT: What If Inflation Fell To 0%?
