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Why the 2% inflation target? (2023)

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Re: Why the 2% inflation target? (2023)

#11

Post by Workaccount2 »

willio58 wrote: post #6

> Once the bill became law, then an inflation target had to be chosen. In an off-hand remark in an interview, the former head central banker said the inflation target should be zero to 1 percent. However, Don Brash, the head of the central bank, claimed “It was almost a chance remark,” and “The figure was plucked out of the air to influence the public’s expectations ”(Irwin, 2014). They used this number as a starting…

A pivotal moment in my career was realizing how much "winging it" was going on even at the highest levels of the craft. Yes, there is a lot skill and intuition behind it, but its still pretty off the cuff.

Re: Why the 2% inflation target? (2023)

#12

Post by bobthepanda »

georgeplusplus wrote: post #3

>> This loss of trust is a major problem. For example, if you no longer believe the Fed inflation target, then you will base your actions on what you think the inflation rate will be, which can lead to cycles of inflation. If you believe inflation will be high soon, you will buy a lot of stuff now when prices are lower. However, other people will realize this too, and then there will be a race to buy goods and servic…

the inflation rate setting is trying to predict human behavior and so it is always a damned if you do damned if you don't.

that being said, the psychological power of central banks is very real. Brazil's real was introduced in 1994, after an intermediate period in which the prices had to be dual listed in the old and future currency, but the future currency had not been printed yet. They just never inflated the future currency, and people seemed to believe that. https://en.wikipedia.org/wiki/Plano_Real

Re: Why the 2% inflation target? (2023)

#13

Post by ajross »

georgeplusplus wrote: post #3

>> This loss of trust is a major problem. For example, if you no longer believe the Fed inflation target, then you will base your actions on what you think the inflation rate will be, which can lead to cycles of inflation. If you believe inflation will be high soon, you will buy a lot of stuff now when prices are lower. However, other people will realize this too, and then there will be a race to buy goods and servic…

You understand that the paragraph you quoted was a didactic illustration[1], not a description of reality, right? In fact inflation is sitting right at 3% right now, not at the 2% target but hardly very far off.

> The real question is Who is in charge here? If the Fed was, they would and could get in front of inflation and raise rates

They... did?

[1] Specifically of the situation where a change of target rate (which, again, is not happening) would be interpreted by the market as a loss of control.

Re: Why the 2% inflation target? (2023)

#14

Post by aspenmayer »

seunosewa wrote: post #2

If everyone targets the same inflation rate, then currencies will tend to be stable with respect to each other.

I don’t think that logically follows unless we can assume or demonstrate that the factors influencing the inflation rate and other factors such as purchasing power parity of all who are targeting the same inflation rate across the board are themselves stable.

Re: Why the 2% inflation target? (2023)

#17

Post by codetrotter »

> Although the idea of a more valuable dollar may sound great, many economists think it is worse than high inflation (Engeman, 2019). The problem is that the value of money would increase when people do nothing with it. This would be problematic since people would not invest or spend money to get the country out of a recession when they could just get a return from doing nothing.

Yes, how terrible that would be.

In reality people would still need to buy things that are actually important.

Housing. Food. Heating. All kinds of stuff. And on top of that we are still gonna spend on the non-essentials as well. It’s not like I’m going to completely stop watching movies or playing games or listening to music just because I know my dollar today would be worth more tomorrow.

The people that would be holding back are the ones that have hoarded all the resources in the first place. And that’s the real problem. Inflation is a bandaid to avoid things getting as bad as they would. But the reason is because of people taking too much and societies that don’t take care of their people. Incidentally the ultra rich also have a lot of clever ways of avoiding being impacted by inflation in the way that it impacts most normal people.

Re: Why the 2% inflation target? (2023)

#18

Post by mindslight »

The combination of monetary creation by the central bank to bring price inflation up to 2% combined with kayfabe austerity by the legislative/executive government is responsible for the utter hollowing out of our economy. The combo has given the centralized financial industry basically unlimited power to make highly leveraged investments for predictable things that conform to their pet models, while vacuuming real wealth away from the edges in the form of loan payments. A fundamental assumption of real working capitalism is that capital is distributed, and this combo has all but destroyed it.

Even if one insists on the orthodoxy that some price inflation is necessary, the new money to create such price inflation represents a distributed taking from our society (ie a tax), and thus should be spent for deliberate purposes by the government - ideally on infrastructure and other investments aimed at creating more wealth in the future - rather than being given to the financial industry as low interest loans to bid up the asset bubble out of the reach of main street. I believe this is the core of Modern Monetary Theory, and while poised to encourage a bit more spending than I would like from an Austrian perspective, it is at least honest compared to the past several decades of the Keynesian+Reaganomics bait, switch, and squeeze.

Re: Why the 2% inflation target? (2023)

#19

Post by vkou »

codetrotter wrote: post #17

> Although the idea of a more valuable dollar may sound great, many economists think it is worse than high inflation (Engeman, 2019). The problem is that the value of money would increase when people do nothing with it. This would be problematic since people would not invest or spend money to get the country out of a recession when they could just get a return from doing nothing. Yes, how terrible that would be. In r…

> Yes, how terrible that would be.

It would be pretty terrible if I became richer not by generating economic activity, but by sitting around with my money in a mattress.

You are correct that it's a band-aid fix... But it's the best one we have.

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