How do in-game economies work, and why do they inflate?

They behave like real economies with one decisive difference: currency is created from nothing and rarely destroyed, which makes inflation the default state of any long-running multiplayer game unless designers work continuously against it.

Faucets and sinks, the central concept:

Faucets create currency and items — quest rewards, monster drops, daily bonuses, resource nodes. Every player generates value continuously.

Sinks destroy them — repair costs, crafting failures, auction house fees, consumables, respec charges, travel costs, cosmetic purchases, and item durability loss.

If faucets exceed sinks, the money supply grows while the quantity of goods does not grow as fast, and prices rise. This is not a metaphor for inflation; it is the same mechanism.

Why it becomes severe:

Efficiency improves over time. Players optimise, and the same content that yielded a modest income at launch yields far more once the community works out the best routes.

Bots and automation generate currency continuously and at scale.

Old content stays profitable while its rewards were balanced for a poorer economy.

Wealth concentrates, since established players compound advantages, and new players face prices set by those who have played for years — the real harm of inflation in games is the barrier to entry it creates.

Real-money trading, which imports outside purchasing power.

The tools designers use: heavy sinks on high-value activities; bind-on-pickup items, which remove goods from trade entirely; seasonal resets or fresh servers; taxing trades; releasing cosmetic money sinks; and occasionally deliberate currency removal events.

Why some games avoid it structurally. Games with full-loot destruction or harsh item decay destroy goods constantly, keeping supply and demand in balance — one reason those designs have surprisingly stable economies despite feeling punishing.

The most-studied cases are the large persistent-world games whose developers publish economic reports and, in some cases, employ economists — a genuine research area, with findings that transfer back to the study of real markets.