The "Forever Stamp"

Changes in the price level are costly. As a result of inflation, firms need to adjust prices; employers and employees need to renegotiate employment contracts; governments need to adjust tax schedules; and the lack of co-ordination between firms, employers, and governments affects relative prices, distorting resource allocation and reducing the efficiency of the economy.

But some of the costs of inflation may be avoided. Take, for example, this story. It is now possible to buy stamps in the United States that have no price on them, but are valid for sending a letter at any time in the future. To the extent that consumers buy these stamps, they protect themselves from future stamp price increases, and they save the US Postal Service future menu costs when stamp prices go up, as they will no longer need to update the "Forever Stamp".

Given the chance, should you buy such stamps? Yes, they provide the opportunity to protect yourself against changes in the cost of stamps. But they also require that you hold stamps, sacrificing possible investment returns from holding your wealth in some other form.

Given that the real (that is, inflation adjusted) return on most investments is positive, there is little incentive to buy these stamps unless you expect the price of stamps to increase at a much faster rate than overall inflation.

This constitutes a compelling argument AGAINST buying the stamps. As the Slate story argues, stamp prices in the US cannot increase at a faster rate than the overall inflation rate by law. So keep your money in the bank, and deal with future price increases as they arise.

That brings me back to the original point. Yes, inflation may be costly. But protecting yourself against inflation may be even more costly.