Okay, now someone explain to me why the covenant's revenue does not increase proportionally with the rising inflation - because it should. Everyone is paying more for everything because they have more money - this should also apply to the goods the magi are selling, right?
Inflation isn't something that should affect covenant finances. It's background noise, a flux in the amount of actual silver that a Mythic Pound represents.
I think the basic idea is that, however you obtain your 1000 Mythic pounds per year -- even if they are, say, 1000 Mythic Pounds in onions rather than in silver -- when you try to spend them/ barter them away to obtain other goods, you are creating a lot more competition for those other goods then there was before. So, whatever goods you try to extract from the local economy, those goods become more expensive for you.
I do agree it's really a rather clumsy mechanic, and the fact that it's "simple" is no real justification for its clumsiness, since it could have been made just as simple but far less clumsy. As an example of its clumsiness, consider a covenant with a Great (250 pounds/year) source of revenue. It's just a minor boon, and not that much compared to what some powerful lords or merchant clans earn. After 60 years, the covenant suffers a magical accident that cuts it off from the outside world - it stops spending any money for food, salaries etc. But its costs stay way up and keep rising! Because it has accumulated 60x2 = 120 pounds of inflation over those 60 years, so it needs to spend 120 pounds/year just to cover that, and that creates even more inflation!
Sure, you can handwave it away as a rule. But then, why bother to write it up? It's not as if the Covenant's finances rules can't be assumed to already cover it.
What I would have done instead would have been to put in place a new Hook that basically says:
"Due to your remote location and/or insufficient access to trade networks, you can only spend freely a quarter (25%) of your income every year. Spending more in a given year is possible, but requires a story that either explains how you managed to trade away your surplus/obtain the expensive goods you are seeking, or has you deal with the negative consequences of the covenant's spending on the local economy".
Covenants p.65 Inflation addresses not only the silver coinage inflation caused by spending lots of silver in a local medieval economy, but also the "corrosive effects" caused by unloading lots of goods into it.
So the title of this chapter is not encompassing all its content: it might have been chosen for brevity, and because silver inflation was foremost on the author's mind.
Also, applying "a rule of thumb" (see en.wikipedia.org/wiki/Rule_of_thumb ) always requires common sense and an eye towards concrete situations - be it in engineering, economy or role playing games. Blindly following a role player's instinct and parsing it in a contrived situation is misunderstanding its purpose.
Cheers
The real question is how long it takes for a covenant to become an established part of the economy and how it started generating wealth, and how long that took. If the Magi show up, grab some nearby land (why wasn't anyone else using it) and starts churning out magically created goods at little expense then the inflationary impact should be immense. Generally, however, establishing yourself to where you can make the kind of income a covenant is making takes some time...
I didn't want to get into the economics discussion but can't help but point out that producing and marketing more goods, all else being equal, should lower prices. That's deflationary, not inflationary.
A Covenant would generate inflationary pressure if it started consuming inordinate amounts of local goods. Unless the Covenant is as big as a large castle or small town, I don't think that's likely. Extremely expense lab equipment and luxuries are probably going to be purchased through long distance trade and not affect local prices at all.
It would be deflationary in terms of the value of the good produced, but in a barter economy the goods you are producing are your currency, which means it is effectively inflationary.
The goods are not your money of account though, mythic pounds are in AM5. A surplus of trade goods will reduce the value of said goods against mythic pounds, not increase the mythic pound cost of other goods and services.
Mythic pounds are an abstract, not a money of account, and most places in mythic Europe (aside from Italy) you will not have money of account, only bartered goods and occasional currency.
As such if our covenant is producing wool, and trading that for goods, and all other goods begin to require more wool in order to purchase them, then for the purposes of our covenant wool is money, which is loosing value. To everyone else in the area of course wool is a good (except fellow shepherds) which is falling in price.
The inflation rules are obviously discretionary (in that they will not always apply), but if the rule of thumb is used, a covenant is forced to improve their income continuously to maintain (not improve) a standard of living. Over the lifetime of a magus (100 years), a covenant that starts spending 100 pounds per annum will need well over 300 pounds at the end (if you round upwards), just to keep the same standard of living.
This is IMO a rather large problem, and it's one that strikes immediately. If a covenant is spending its income (rather than living below its means), it runs into a cash crisis right away. The 'standard' 4 magi spring covenant can easily spend 100 pounds a year without really trying*, so the default setting is not a tenable situation, and that's a problem.
*You generally have to employ a lot of the cash saving options in Covenants to make it work on less than 100 pounds.
Standard is, I believe, 6 magi, with a reduction in base income per missing magus of 15 lbs per magus, meaninga 4 magus covenant would have 70 lbs per year for expenses.
100 pounds causing inflation seems to be based on assumptions that might not be valid in more populous areas. I'm pretty sure that's going to be a drop in the bucket someplace like Merv or Baghdad (both with populations estimated at around one million before the Mongols show up).
I suspect the idea of inflation as a long-term and inexorable erosion of living standards is linked to political ideas about inflation in circulation in 2006. When much of the developed world is both printing money and running negative interest rates -- and not generating inflation -- such views seem somewhat out of place.
My best advice, simply drop the inflation and annual fluctuation rules and only change covenant finances based on a story.
personally I use the annual fluctuation rules but ignore inflation, though I give a bonus to the annual variation based on the reaction total from the magi amongst covenfolk- I figure happier covenfolk are more productive, while those who are alienated tend to be less enthusiastic about work...