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What Does an Inflation Rate of Zero Mean?
By: Michael Wolfe
Inflation is a measurement of a change in the value of a unit of currency over time. When a unit of current of currency loses buying power over time, the currency is said to be experiencing inflation; when the currency gains buying power, it is said to be experiencing deflation. Inflation is usually measured as a percentage, usually as the percentage by which a currency inflated in a single year. An inflation rate of zero means the currency did not change in value.
The value of a currency can be measured in two ways: in relation to other currencies and by how many goods a unit of the currency can purchase. For a number of reasons, the value of every currency whose rate of exchange is not controlled the government will fluctuate constantly as prices of goods denominated in that currency change. An inflation rate of zero would be relatively unusual in a free market, as economics are rarely static.
Essentially, an inflation rate of zero would mean that a single unit of currency could buy as much today as it could the last time that the inflation rate was measured. Regardless of how much time has elapsed, the inflation rate is usually expressed in terms of yearly change. For example, if a unit of currency can buy twice as much as it could a year ago, then the inflation rate could be said to be 100 percent. If the unit bought the same as it did a year ago, the rate would be 0 percent.
According to Keynesian economic theory, a government should attempt to keep inflation relatively low by controlling the money supply. Too much inflation makes goods unaffordable, leading to a slowdown in consumer spending, while deflation, or negative inflation, can lead to a drop in revenues for businesses, leading to layoffs. An inflation rate of zero might suggest economic stagnancy and suggest that the economy is on the cusp of deflation.
There is no means of precisely measuring the rate of inflation. Rather, the rate of inflation is calculated through the sampling of average prices of a bundle of different goods. Comparing the prices of goods listed in an index over different time periods provides a means of estimating how the value of currency as changed. A inflation rate of zero doesn't mean no prices have changed, just that, on average, the measured currency could buy as much now as it could before.
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