Why is the central bank inflation target typically 2%? Well if you target 0% and any actual result below 0% happens, that's deflation which is a disaster for economies. If inflation is say 10%. Maximum employment is near certainly impossible. Debt will be expensive and the economy crawls to a halt. Who wants to pay 10% interest on their student debt? So where in between do you have a good price stability? It tends to…
I keep hearing that people in debt win when inflation goes up but the problem is you only win if you have assets that already appreciate in value or access to large amounts of capital to purchase assets that are inflation resistant. Simple example Tim is a manager at Lowe's Tim makes $66,000, each year. Tim spends most of that money on the necessities of life, a car payment a house payment if he is lucky, a rent if h…
Inflation is good for debtors if wage keeps pace with inflation. That's it.
Taken to the extreme: Imagine I make $100k in 2030. I take out a 1 year loan for $10k @ 5% (10% my income). Inflation is at 50%, but my wages keep up. 2031: I make $150k. I pay back the loan: $10.5k (7% my income). The loan is worth less as a percentage of my income, because of inflation and wages keeping up.
Generally speaking, wages do keep rough pace with broad CPI inflation, if the inflation is slow, predicted, and a product of monetary policy. The issue in today's climate is multifold, but: first, there are critical sectors of consumer goods which are substantially out-inflating even the elevated CPI averages (housing/rent & microchips are the biggest). Second, most CPI-calculated goods are inflating not due to monetary policy, but due to supply-shock, which is harder to mitigate with wage increases because, well, in short, companies can't make money to give workers raises if they can't sell stuff.