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Cataclysm, Inflation, and the WoW Economy

It’s no surprise that there are many huge game changing elements prepared for Cataclysm, but perhaps the most game changing are those not even planned. I’m talking about inflation and it’s about to take the World of Warcraft economy by storm.

What is Inflation?

A rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also the erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.

In short, the gold you have accumulated in WotLK is going to actually be worth less, or in other words, buy fewer items / services in Cataclsym. Ex. you bought infinite dust for an average price of 2 gold in WotLK, but are now willing to pay 3 gold in Cata.

cataclysm gold inflationIs this a new phenomenon to WoW?

In a word, no. The inflationary cycle has been an ever present fact for each major expansion pack release. They are caused by several factors, but in my opinion in accordance with the monetarist view of inflationary economics,  the biggest factor is in the dramatic increase in the money supply. The money supply is increasing for several reasons.

  1. Quests in Cataclysm will reward more experience and higher valued (vendor) item rewards than those in WotLK
  2. The end of a given expansion is always marked by a huge saving period. Raiders often stop raiding several weeks, or months, prior to an expansion and there is a general saving trend. Resulting in huge cash reserves that will be rapidly dumped into the economy upon the Cata launch.

Point #2 is particularly interesting, as the last year of Cataclysm has seen perhaps the greatest increase of WoW rich guys in the game’s history. The world first player to hit gold cap was just January 2008. Since that time, but particularly since WotLK released there has been a huge number of players hitting the gold cap, or at the very least, amassing huge sums of gold.

If Blizzard knows this is going to happen why don’t they do something?

The fact of the matter is, they are! And for most expansions they have done a great job of preventing hyper inflation. In the real world governments can help to decrease inflation by increasing spending or taxation. Blizzard is a bit handcuffed in that regard, because they are not direct participants in the WoW economy so they cannot increase their spending and they don’t currently tax players (with the exception of the WoW auction house).

So instead they find ways to sneakily increase player spending right before an expansion. This helps to reduce the money supply in preparation for the expansion. They do this in a variety of ways:

  • Implementing changes to make players “want” to spend gold. Ex. the glyph craze of 4.0.1, making Wrathful PvP gear require no rating requirement (players acquire this gear and then buy enchants, gems, etc.)
  • Introducing very expensive and desirable items. Ex. the Gigantique bag of 3.0.1 (cost 1,200 gold, a huge sum at the time), late expansion vanity pets

In these ways Blizzard is able to reduce the overall money supply and create a more positive economic environment for natural growth to occur in the expansion.

Why these changes won’t be enough for Cataclysm

While Blizzard has made some great changes and helped to reduce the money supply, it’s my opinion that it simply isn’t enough. The main reasoning behind this is simply the sheer volume of super wealthy WoW players. There is a huge, and growing, population of gold top dogs on each server who have the ability to do severe damage to the economy. In addition to the super rich, you have an immense population of players who have simply been saving for far too long.

The glyph craze, wrathful pvp gear, and other 4.0.1 changes helped to get players spending a lot bit, but most of this gold went right back into the hands of the WoW super rich. Unlike with the WotLK launch, most of those changes directly removed currency from the economy by requiring vendor purchases.

What’s going to happen and what to do

The inflationary period will likely not exist long-term in the WoW economy. This is simply because players aren’t going to keep saving. Once the initial period of extreme spending ends, perhaps 12 weeks, prices should drop down into more “normal” levels. However, I would say the first 3 months of the launch will be marked by abnormally high prices, even beyond what we have seen in previous expansions.

Even after the initial inflationary boom there is likely to be a higher than average static inflation that persists throughout the next expansion. The insanely high money supply combined with a substantial increase in the amount of gold from quests should solidify a strong inflationary period after Cata’s launch. That said, it’s not all bad, but it’s important to not buy into the inflationary panic.

  • Save your big purchases until after the initial hyper inflation panic has died off
  • Virtually any items you can farm / craft / find are going to be their most profitable in the long-term if you can sell them as soon as possible. Don’t wait around thinking you’ll craft or farm something later. If you do it now you’ll make a much higher return over the long-run.

For fear of sounding any more like the fear mongerer Roubini I’ll just leave you with this. Don’t panic! The increased inflationary period will probably persist for a time on most WoW servers, perhaps not all, and for perhaps not as long as I’ve guessed. There are so many potential factors that go into the equation it’s hard to speak in any sort of absolutes. However, without panicking we can prepare ourselves and profit / not lose gold unnecessarily by just being informed.

As always, what are you thoughts? Share your comments below.

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Comments

One Response to “Cataclysm, Inflation, and the WoW Economy”

  1. Stddeviation - Maelstrom on January 28th, 2011 4:00 am

    For the most part I agree. I would also add that regressively nerfing the lvls decreases time it takes to naturally farm the quantities of raw mats needed to meet the demand of professions lvling. Therefore, prices must increase to maintain equalibrium.

    Blizz could counter-balance by increasing drop quantities per loot, however, increased prices would make it easier to pay for existing mounts/training/funstuff…

    Thanks for posting this,

    For the Alliance,

    Stddeviation
    Maelstrom

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