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Why the 2% inflation target? (2023)

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

#441

Post by chii »

roenxi wrote: post #337
itsoktocry wrote: post #280

Earlier quoted context omitted.

> The economy is rigged such that in the absence of any positive action, workers' purchasing power goes down over time by default. This obviously isn't a problem for the rich, whose money is stored almost entirely in assets which by definition rise in value with inflation. Look, I'm sensitive to the struggles of the less well off, and that we are in a particularly rough part of a cycle. I don't believe the economy is…

> Society has become significantly wealthier, despite the absurdities of inflation and interest rates. That is the issue with the absurdities of inflation and interest rates - how do you tell whether we're better off if the yardstick for measuring value is being purpose fully distorted? And the way we measure the distortion seems to be unreliable;I don't see how inflation is supposed to rise faster than wages but ass…

> We're seeing political discontent in the UK and US that seems to be linked to people who don't believe that they are becoming better off

I think there's a section of people in this demographic who have been seeing how much better off _others_ are (thru social media etc), and thus feel discontent. This is exacerbated by the fact that such type of discontent inducing content is clickbait and gets people emotional (therefore, engagement).

There's some truth, perhaps, to the idea that some people were better off in the seventies than today, but the majority of people are likely living a wealthier life today. They just dont feel it, because there exists an even wealthier class that is now very visible, and it has been ingrained into the youths that modern society has moved past feudalism and classism.

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

#442

Post by ThePowerOfFuet »

rhelz wrote: post #295
sob727 wrote: post #5

Yellen supposedly told Greenspan & co in the mid 90s that 2% was a good way for companies to be able to adjust labor costs down if needed (if you don't give someone a raise when inflation is 2%, you're effectively lowering their salary). It was the only way to have some flexibility there. If you admit that this is a desirable thing, this is defeated by wage negotiations (or say, benefits) than tend to be indexed to i…

Well, no matter how the 2% figure was arrived at as a matter of historical happenstance, 2% is actually a very good number to shoot for. First of all, a rate of zero would be ideal, but, lets face it, like any measurement, this is going to have some error. So, if you are going to err, on which side do you want to err? In favor of a little bit of inflation, or a little bit of deflation? Well, inflation is painful, sur…

>if we had 50% deflation, your paycheck--the dollar amount you brought home--would be cut in half. However, your car payment, your mortgage, and your credit card bills would stay at the same nominal value

If your contract says you make $5000/month in salary, then why would the number of dollars decrease? They wouldn't increase due to inflation unless the employer chose to "give you a raise" (just adjusting for inflation perhaps), but they can't unilaterally decrease your salary (in countries that don't suck, anyway).

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

#443

Post by chii »

throwawaymaths wrote: post #440
graeme wrote: post #260

Earlier quoted context omitted.

You haven't understood the issue. If a firm needs to lower costs, the alternatives to mild inflation are: * Negotiating actual salary cuts, or * Job losses Ideally in a market, prices adjust up and down freely. Obviously this is not a sensible approach to salaries. Given the bias towards loss aversion, having mild inflation make mild losses is preferable to having, say: 5% deflation, 7% salary cut. This concept is fr…

So you're saying that it's government's responsibility to let firms be shitty to their employees with stealth pay cuts? I would MUCH rather a firm have to face the music and reputational damage of cutting employee pay or firing employees. It's far more honest and the actual other option is gasp don't cut your employees wage and instead take a hit to your margins.

if you were the one whose jobs' being cut, would you make that very same argument?

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

#444

Post by chii »

kypro wrote: post #407
FactKnower69 wrote: post #237

Earlier quoted context omitted.

>2% was a good way for companies to be able to adjust labor costs down if needed (if you don't give someone a raise when inflation is 2%, you're effectively lowering their salary) This is EXACTLY the issue. The economy is rigged such that in the absence of any positive action, workers' purchasing power goes down over time by default. This obviously isn't a problem for the rich, whose money is stored almost entirely i…

I'm highly critical of the Federal reverse and I think they suppress wages in other ways, but the 2% inflation target in my opinion has no impact on wages broadly. Assets don't automatically rise in value with inflation. If you own shares in a business generating $100,000 in profit in the current year, then it won't automatically generate $102,000 the next year. In fact, because of inflation it will probably generate…

> It's very hard for inflation to rise without wages rising

for inflation caused by external factors - such as a war and spiralling high energy prices - it can rise without wages rising.

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

#445

Post by tsimionescu »

throw0101d wrote: post #122
sob727 wrote: post #5

Yellen supposedly told Greenspan & co in the mid 90s that 2% was a good way for companies to be able to adjust labor costs down if needed (if you don't give someone a raise when inflation is 2%, you're effectively lowering their salary). It was the only way to have some flexibility there. If you admit that this is a desirable thing, this is defeated by wage negotiations (or say, benefits) than tend to be indexed to i…

> Another interesting thing that happened under Greenspan is how inflation is computed (hedonics, replacements, etc... conceptually, think "if I can't buy a porterhouse steak anymore, I'll get the lesser hanger", meaning inflation is underreported). Inflation calculations (in the US) did not happen under Greenspan, or under any other Federal Reserve chair, because the calculations are not done by the Fed, but by the…

The OP and your reports agree: the Boskin committee changed the way inflation is calculated. The new way says there is less inflation than the old measure said.

So, if the new measure is actually wrong, then inflation is underreported now, when it used to be correctly reported before. The Boskin committee believes it was overreported before and it is now correctly reported.

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

#446

Post by tsimionescu »

baronswindle wrote: post #334
OnlineGladiator wrote: post #294

Earlier quoted context omitted.

> One of the conclusions was (AIUI) that the CPI then-methodology actually resulted in numbers too high. How is this any different from saying they changed the methodology to make the numbers look better? In my opinion the old methodology was better, but I realize this is a complex issue and there is no "correct" answer.

The way I read it, it’s actually the opposite of what you wrote. You suggested that the Fed relied on inflation numbers that it knew to be too low — i.e. that inflation was understated due to failure to account for substitution effects and the like. In fact, the Boskin commission concluded the opposite — i.e. that inflation figures were overstated in aggregate due to failure to account for things like quality changes…

No, they suggested it now relies on inflation numbers that it knows to be too low. They said that inflation numbers used to be more realistic, but they have recently been lower than real inflation that consumers experience.

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

#447

Post by b112 »

koolba wrote: post #336
IggleSniggle wrote: post #307

Earlier quoted context omitted.

Another important distinction to make for those that might not be aware: in the US, mortgages mostly are a set-rate when the loan is issued, usually either at 15-years or 30-years. In most of the rest of the world, I'm told, mortgages are typically variable rate

> In most of the rest of the world, I'm told, mortgages are typically variable rate They also tend to be shorter than the standardized USA 30-year fixed.

Yes in Canada for example most people have 5 year renewals, which means a renegotiation, at that time, at existing rates.

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

#448

Post by chii »

from-nibly wrote: post #195
lupire wrote: post #165

Earlier quoted context omitted.

This is the solution to the "two-income trap".

Wouldn't a 2.5 day work week actually be the solution to the "two-income-trap"?

but you would be out-competed by people who work 5 days. The reason things like housing is expensive is because there are lots of people willing to pay higher. This implies that those people _have_ become wealthier. You would not hear them complain about being poorer (or it's an insincere form of complaint).

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

#449

Post by wodenokoto »

sob727 wrote: post #5

Yellen supposedly told Greenspan & co in the mid 90s that 2% was a good way for companies to be able to adjust labor costs down if needed (if you don't give someone a raise when inflation is 2%, you're effectively lowering their salary). It was the only way to have some flexibility there. If you admit that this is a desirable thing, this is defeated by wage negotiations (or say, benefits) than tend to be indexed to i…

Inflation is meaningless if you don’t include substitutes as part of defining your basket.

The price of typewriters, film or rotary phones are completely irrelevant to the cost of living today and would be meaningless to include.

You don’t substitute beef with beef. You substitute elk with beef, if elk used to be a stable but now isn’t.

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

#450

Post by fouc »

lumost wrote: post #351
patmcc wrote: post #333

Earlier quoted context omitted.

This doesn't address the claim oblio was making - 'People are poorer than they were in 1990, especially the mid to lower classes' - real GDP per capita could double but it all be captured by the top quartile, for example. (I think the claim is still wrong, and that all quartiles are doing better in real terms, but that's a tougher thing to measure)

https://wtfhappenedin1971.com/ Annual wages are about 15% higher today compared to 1971 in real terms. Real terms is a bit suspect in this case as wage earners are more likely to pay nominal rent then owner equivalent rent. It may well be accurate that the average wage earner is worse off today then they were in 1971. I'd venture a speculation that this is reflected in media, sitcoms of the 70s rarely had roommates -…

Shared living arrangements have been prevalent long before the 70s, boarding houses and the like. I wouldn't rely on film and television industry to be exactly that representative of the times.
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