Encyclonomic WEB*pedia: STABILITY

STABILITY:
Eliminating macroeconomic fluctuations in prices, employment, and production. Stability is primarily directed toward keeping inflation in check and avoiding high or unpredictable inflation rates that create uncertainty and cause haphazard redistribution of income and wealth. This is one of the five economic goals and one of three macroeconomic goals. The other goals are economic growth, full employment, efficiency, and equity.
Stability is achieved by avoiding or limiting fluctuations in production, employment, and prices by avoiding the recessionary declines and inflationary expansions of business cycles. This goal is indicated by month-to-month and year-to-year changes in various economic measures, such as the inflation rate, the unemployment rate, and the growth rate of production. If these remain unchanged, then stability is at hand. Maintaining stability is beneficial because it means uncertainty and disruptions in the economy are avoided. It means consumers and businesses can safely pursue long-term consumption and production plans. Policy makers are usually most concerned with price stability and the inflation rate.
Long-Term Planning
Instability creates uncertainty which makes long-term planning by consumers, businesses, and even governments more difficult. By inference, stability, especially stable prices, provides greater certainty that makes it possible for consumers to commit to multi-year mortgages or car loans, for businesses to undertake capital investment, and for governments to anticipate tax collections and plan expenditure budgets.
Consider the circumstances facing Jonathan McJohnson, a typical thirty-year-old mid-level manager for a modest corporation. Jonathan is thinking about buying a new car, accompanied by a 5-year loan. Does he make the purchase? If he expects with some degree of certainty that the economy will grow modestly with limited inflation, then he is likely to make the purchase, confident that he can meet the scheduled loan payments. However, if the economy has been fluctuating wildly in recent years--high inflation, no inflation, deflation, recession, up, down, good, bad--with expectations that this will continue, then he probably is reluctant to make such a 5-year commitment.
Haphazard Redistribution
The instability of inflation also causes haphazard redistributions of income and wealth that are usually unwanted and often counterproductive. Such redistributions work through resource payments and through interest rates.
Resource Payments: The instability of inflation generally means prices change at different rates. Some prices rise, others fall, still others remain unchanged. Different price increases translate into different payments to resources, and thus different incomes. In other words, those products and industries with higher price increases, receive relatively more income. Those with lower price increases, or even price decreases, receive relatively less income.
Suppose, for example, that health care prices rise a great deal with inflation and farm prices remain unchanged. If so, income and wealth are redistributed from resources in the farm industry to resources in the health care industry. Herb Haberstone, a farmer, ends up with relatively less income and wealth and Dr. Dowrimple T. Bedside, a medical doctor, ends up with relatively more income and wealth.
Interest Rates: The instability of inflation has a direct impact on the interest rates charged in financial markets. A rule of thumb is that the nominal interest rate (the one actually charged) is the sum of the real interest rate (which would exist with no inflation) and the expected inflation rate. This nominal interest rate compensates for the changing purchasing value of money caused by inflation. Inflation instability often means the expected inflation rate differs from the actual inflation rate, meaning the nominal interest rate is higher or lower than it needs to be. When this happens income and wealth are redistributed between borrowers and lenders.
Suppose, for example, that Duncan Thurly has just committed to a one-year loan from OmniBank. Duncan and OmniBank agree to a 10 percent nominal interest rate, based on an 8 percent real interest that the OmniBank charges to cover expenses and to earn a profit, plus an expected 2 percent inflation rate for the coming year. If the inflation rate is 2 percent in the coming year, then all is well and there is no redistribution of income and wealth.
However, if the inflation rate is greater than 2 percent (say 4 percent), then income and wealth are redistributed from lender (OmniBank) to borrower (Duncan). The money Duncan uses to repay the loan is less valuable, due to higher prices, than everyone expected. Duncan wins, OmniBank loses. If the inflation rate is less than 2 percent (say 0 percent), then income and wealth are redistributed from borrower (Duncan) to lender (OmniBank). The money Duncan uses to repay the loan is now more valuable, due to lower prices, than everyone expected. Duncan loses, OmniBank wins.
More Than Inflation
While the primary focus of this goal is price stability and inflation, it is also more broadly concerned with production and employment stability associated with business cycles. While fluctuating prices cause havoc for the economy, so too does fluctuating employment and production. All-in-all the economy is generally better off by avoiding large swings in prices, employment, and production.
The Politics of Stability
The macroeconomic goal of stability would seem to be universally acknowledged as a beneficial pursuit. This, however, is not necessarily the case. At the very least, some are extremely passionate about achieving price stability and eliminating inflation. Others might actually find the existence of instability and inflation somewhat desirable.
Consider the two basic political philosophies--conservatives and liberals.
Conservatives: Those who own a significant amount of financial assets (that is, net lenders) tend to dislike inflation more than most. This includes banks and those with above average wealth. Inflation reduces the value of their financial assets. Conservative politicians count these folks among their core constituency.

Liberals: Those who owe a significant amount of financial debt (that is, net borrowers) tend to like inflation more than most. This typically includes middle and lower income consumers with mortgages, car loans, and credit card debts. Inflation makes it easier to pay off these loans. Liberal politicians count these folks among their core constituency.
Check Out These Related Terms...
     | macroeconomic goals | full employment | economic growth | microeconomic goals | efficiency | equity |
Or For A Little Background...
     | economic goals | macroeconomics | mixed economy |
And For Further Study...
     | economic analysis | seven economic rules | economic system | central planning | government functions | price stability | inflation | unemployment | business cycles |
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     STABILITY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2025. [Accessed: December 16, 2025].