Definition: Price stability is the stable level of prices in the economy, which avoids long periods of inflation or deflation and sustains the value of money over time. Price level stability is important for savers.
What Does Price Stability Mean?
What is the definition of price stability? Price level stability denotes that consumer spending is not affected by inflation because consumers do not worry that the value of money will change anytime soon. It is important to separate the increase in the prices of individual goods or services from the increase in the general price level.
In market economies, it is expected that individual prices will change following the changes in demand and supply, but this doesn’t mean that the general price level will change as well. Governments and central banks set a target inflation rate up to 2% because such a low inflation cannot affect the economic activity and the financial stability. Furthermore, price level stability contributes to employment because the increased demand for goods and services forces business to hire more workers.
Let’s look at an example.
Example
Price level stability enables consumers to identify the relative prices of goods and services. These changes are included in the variations of the general price level. For example, we assume that the price of a product increases by 4%. If the general price level is stable, consumers know that the relative price of this product has increased, and they may decide to buy less quantity of it.
On the other hand, if the general price level is unstable due to high inflation, consumers won’t be able to determine the relative price, as during periods of economic instability prices change at a fast pace. Therefore, price level stability allows firms and consumers to realize the changes in the prices, and make informed consumption and investment decisions.
Summary Definition
Define Price Stability: Price level stability is an economic theory that when the prices of goods and services aren’t regularly volatile, consumers are more likely to make buying and selling decisions without thinking about inflation or the consequences of it.
