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Inflation is a part of the EU3 economic system which affects the cost of various actions. It acts as a limiting force to heavy minting and managing inflation is vital to the long-term economic health of any nation. Simply put, inflation acts as a cost multiplier to almost everything.
How inflation works
The level of inflation can be seen on the Domestic Economy interface screen of the Domestic Management interface. Inflation is presented as a percentage and is strongly linked to minting. An inflation of '4.0' means that affected costs are increased by 4%, so under this level of inflation an action costing 100 ducats would instead cost 104 ducats, disregarding any other factors.
The following costs are affected by inflation:
- Army and Navy recruitment
- Army and Navy maintenance
- Building province improvements and manufactories
- Stability investments
- Research investments
- Spies, missionaries, merchants and colonists
- Advisors (both appointment and monthly salary)
Costs in events are not affected by inflation.
Factors contributing to inflation
The primary causes of inflation are as follows:
- Minting: Minting is generally the main contributor to inflation. The proportion of monthly income that is minted contributes to inflation at a 1:100 ratio annually. That is if 60% of the monthly income is minted then 0.6% inflation is added over the course of a year (or 0.05% per month).
- Events: Events can both add and remove inflation and are usually accompanied by other effects, both positive and negative.
- Gold: Income that comes from gold causes inflation when gold income is greater than 40% of trade, taxation, gold, and production income combined. Vassal, toll, harbor fee, tariff, census tax, and other income are not included in this calculation. This is generally only a problem for African or New World countries with several gold mines.
The easiest way to reduce inflation is to refrain from minting money (move the Treasury slider left). Census taxes add money directly to the treasury at the end of every year, and with careful fiscal management players can use this money to finance their operations in their entirety. However to maintain a large military, colonies or many other things, the player will find that it needs to mint at least some of the nation's income.
There are several methods to reduce inflation:
- The national idea, National Bank will offer a 0.1% decrease in inflation every year.
- The Master of the Mint advisors reduces inflation by 0.02% per star per year (for a maximum of 0.12%).
- The province improvement, Tax Assessor, available at government technology level 23 (level 31 in In Nomine and later) for a basic cost of 50 ducats diminishes inflation by up to 0.5%. In and earlier, a tax assessor can be built in every province and the inflation reduction depends on the proportion of provinces that have one. In , the assessor is a unique building, and always provides the same reduction.
- Every degree of Centralization reduces inflation by 0.01% per year. (There is no penalty for being Decentralized).
- Certain events, such as Dramatic Currency Revaluation, will lower inflation, as well as moving a slider to Free Subjects giving a chance at inflation reduction.
Inflation cannot be reduced below zero. However, inflation-reducing ideas, advisors or buildings will allow the player to mint some amount of money without causing any inflation. For instance, a 0.1% decrease in inflation every year would allow a nation to divert 10% of monthly income to the treasury without incurring any additional inflation.
Inflation as part of the EU III economic model
Inflation in the game can be hard to understand because monthly revenue and census tax revenue are treated so differently. Monthly revenue is earmarked for economic/technological development and can only be added to the treasury at the penalty of inflation, whereas census tax revenue is added directly to the treasury and can only be committed towards development at an increased cost.
One way to imagine it is to consider "monthly income" to be a representation of economic activity, not government income. The "treasury" slider allows the government to mint money, but that new money destabilizes price levels and "crowds out" private economic activity and natural economic development.
Acceptability of Inflation
Acceptable rates of Inflation are debatable and differ per country and playstyle. Generally an inflation level of 10.0% is the normal cap, when speaking of the period 1399-1700. Any inflation over this should be avoided, as it will affect the long term efficiency of the country. At 20.0% inflation, the situation can be regarded critical, in this situation, immediate action will have to be taken.
Trade countries, or small countries, can often take larger amounts of inflation without feeling economical penalties. The research speed of small nations often compensates for the inflation decrease. For European countries, an annual growth 0.01% - 0.10% inflation is a largely acceptable rate, with National bank in place, a 0.11% - 0.20% rise is acceptable. As soon as the inflation is above 10.0%, it is however advised to stop minting.
Asian/Muslim/Eastern/Indian tech nations will always have a struggle with inflation to keep their technological speed at the same level. Generally, Asians will have a hard time controlling their inflation, particularly because of the large armies and lack of National Bank early on.