Why is moderate inflation generally viewed as a positive sign for the economy?

Moderate inflation is often perceived as a positive indicator for the economy because it signifies that demand for goods and services is rising, which typically accompanies economic growth. When inflation is at moderate levels, it often reflects increasing consumer confidence and willingness to spend, leading businesses to invest in production and expansion. This cycle creates more jobs and generates higher income levels, reinforcing the economic growth narrative.

Furthermore, moderate inflation encourages spending and investment rather than saving, as consumers and businesses aim to purchase goods and services before prices rise further, thus stimulating the economy. In this context, inflation can be a sign of healthy economic activity, differentiating it from excessive inflation or deflation, which can indicate economic instability.

In contrast, higher interest rates usually correlate with attempts to control inflation, while price stability is more associated with low and stable inflation rates, rather than moderate inflation. A decrease in consumer spending corresponds more to economic contraction, which stands in contrast to the positive connotations of moderate inflation.