Why central banks insist on a 2% inflation target(english.elpais.com)
english.elpais.com
Why central banks insist on a 2% inflation target
https://english.elpais.com/economy-and-business/2023-09-21/why-are-central-banks-insisting-on-a-2-inflation-target-a-percentage-that-was-born-in-new-zealand.html
19 comments
Agree. Targeting the very boundary where people notice leaves no room for error. Target 2% and natural fluctuations that central banks can only react to will keep it for more unnoticeable.
I wish the author would have gone into more about the drawbacks of this. Sure it’s easier to get down to target inflation if you move the goalpost but it hurts the majority of people and only helps asset owners.
The majority of Americans ARE asset owners. That's exactly the kind of behavior that a non-zero inflation wants to encourage.
https://www.statista.com/statistics/270034/percentage-of-us-...
https://www.statista.com/statistics/270034/percentage-of-us-...
Paywalled, but what I should clarify is income generating assets. If you live on an income inflation is negative vs individuals who mostly gain from assets aren’t affected by it and thus grow their real wealth.
This is a personal choice, not economic policy.
No one is forcing anyone to become owners of assets, but in practice anyone (even the poor) can become asset owners, as assets can be more than just a home. Putting $30/mo into financial assets is attainable by anyone.
Poor financial decision making will always be present, and the idea is to encourage (but not force) people to make rational economic decisions.
No one is forcing anyone to become owners of assets, but in practice anyone (even the poor) can become asset owners, as assets can be more than just a home. Putting $30/mo into financial assets is attainable by anyone.
Poor financial decision making will always be present, and the idea is to encourage (but not force) people to make rational economic decisions.
25% of American have 0 savings, and 8% do not have health insurance. There is a non trivial amount of people who struggle putting 30 USD/month into financial assets.
People who are unable to increase their incomes enough to own assets will always be behind those who can. Is it fair? Not really. Is it a fact? Yes.
Doesn’t high inflation help asset owners even more? Their assets rise in value alongside inflation, while the majority of regular people with few assets have to rely on wage increases keeping up with inflation.
The proposed new normal is 2-3% target instead of 1-2%. So yes I agree with you and wish the author of the article would discuss this.
Why? So they can slowly steal from you and hope you won't notice.
As technological advancement drives increased productivity, purchasing power that would have otherwise accrued to the not-asset-owning class in the form of price deflation is siphoned off by central planners who would like a way to levy taxes without having to go through the democratic process.
The justification/counter-argument from academia is that if deflation were allowed to occur it would harm the economy by disincentivizing the circulation of money (since all you have to do to is wait and your currency becomes more valuable).
The counter-counter argument is that it is nonsensical to expect that a falling cost of living would harm the economy because price deflation is, on the contrary, an effect of economic growth that has already occurred.
The justification/counter-argument from academia is that if deflation were allowed to occur it would harm the economy by disincentivizing the circulation of money (since all you have to do to is wait and your currency becomes more valuable).
The counter-counter argument is that it is nonsensical to expect that a falling cost of living would harm the economy because price deflation is, on the contrary, an effect of economic growth that has already occurred.
I always thought that the argument against the gold standard/BTC/whatever (relatively) stationary or deflationary currency is that the money supply needs to be elastic to account for the change in the size of the economy. That is, as the economy grows, there needs to be more currency to support it.
No arguments against the idea that inflation is effectively a tax.
No arguments against the idea that inflation is effectively a tax.
My understanding is that everyone agrees that expanding the money supply under conditions of economic growth is necessary to avoid deflation.
The contention centers on whether price deflation is a good or bad thing.
If you're a "grow the pie" kind of person, you probably think that it's a good thing because falling prices without falling demand is simply a sign of the pie having grown.
If you're a "redistribute the pie" kind of person, you understand that deflation is an opportunity to control where newly created wealth is funneled to without the people who create the wealth noticing.
The contention centers on whether price deflation is a good or bad thing.
If you're a "grow the pie" kind of person, you probably think that it's a good thing because falling prices without falling demand is simply a sign of the pie having grown.
If you're a "redistribute the pie" kind of person, you understand that deflation is an opportunity to control where newly created wealth is funneled to without the people who create the wealth noticing.
A positive inflation target is a de facto commitment to endless growth and consequent environmental destruction. It’s grossly irresponsible.
Inflation is just prices, not production, and not GDP. Inflation can happen with declining energy consumption and declining industrial production, and in fact, very likely would.
All a positive inflation indicates is endless growth of numbers in bank accounts. The actual economic and industrial activity can grow or shrink completely independently of it (and a lot of a central bank's job is trying to make sure that those are separate: that money supply matches the size of the economy)
- 3% is the limit before people notice
I'd add: the recent experience shows that 1% is too low because undershoot leaves the central bank stuck on the zero-bound with no room to inject stimulus without acrobatics.
Sounds like a range centred on 2% is current best practice. Anyone deliberately running hotter tends to run hotter than they intend.
Any good counterexamples?