Why the 2% inflation target? (2023)

>>In the current environment, cost inflation is not a problem anymore.

Everyone person who lives paycheck to paycheck, and is barely keeping their head above water as the cost of everything continues to skyrocket disagrees with you.

Good luck telling them that "cost inflation is not a problem anymore".

I can't speak to how things are in Denmark, but without a doubt the situation for young people (especially those looking to rent or buy a house ) HAS changed dramatically for the worse in the USA.

As someone else pointed out at 3% , it's at least 50% above the target I don't see how someone can consider that small. Cherry picking historical data as a way to hand wave that fact is disengenious at best.

Even if for some reason you think 3% is not high, inflation is clearly starting to reverse which the fed has admitted its not gonna get better in the short term.

Contrast this to Volker who made the hard decision to raise rates well above inflation not once but twice.

I'm going to be honest, if you put half as much effort into learning the very, very basics of how the system worked as you did into campaigning against it by furiously incorrecting everyone in this thread, you'd probably feel a bit embarrassed to be posting stuff like "there's no real cost of defaults" .

The money was "created out of thin air" is the loaning bank's debt to the account the borrowed money is assigned to, not the bank's asset, so there's a very real cost to them if the borrower defaults and stops repaying them. Banks can become bankrupt, just like any other business, and no, they can't "print" their way out of it.

If you're still struggling to believe there's no real cost of defaults to banks, I invite you to look up bank insolvencies. Perhaps someone could make a wtfhappenedin2007 website.

I'm also chuckling away at you complaining that the current system means mortgages take too long to pay off a sentence after complaining that people who get into debt are rewarded! For the record, what you're actually advocating for with higher "free-market" interest rates is that poor people pay rich people more over the course of 25 years than they currently do over 35 or even 50 years to secure a house, which is less likely to appreciate in value. US home ownership rates were down at 40% before governments got involved in the mortgage market. It's impossible to pretend that anyone benefits from such a system other than people who are much, much richer than average home buyers.

> […] they changed it to make the numbers look better.

They changed the number because the number was not modelling reality as accurately as it could have.

Perhaps actually read the Boskin Report:

> 5. Changes in the CPI have substantially overstated the actual rate of price inflation, by about 1.3 percentage points per annum prior to 1996 (the extra 0.2 percentage point is due to a problem called formula bias inadvertently introduced in 1978 and fixed this year). It is likely that a large bias also occurred looking back over at least the last couple of decades.

> 6. The upward bias creates in the federal budget an annual automatic real increase in indexed benefits and a real tax cut. CBO estimates that if the change in the CPI overstated the change in the cost of living by an average of 1.1 percentage points per year over the next decade, this bias would contribute about $148 billion to the deficit in 2006 and $691 billion to the national debt by then. The bias alone would be the fourth largest federal program, after social security, health care and defense. By 2008, these totals reach $202 billion and $1.07 trillion, respectively.

> 7. Some have suggested that different groups in the population are likely to experience faster or slower growth in their cost of living than recorded by changes in the CPI. We find no compelling evidence of this to date (in fact just the opposite) but further exploration of this issue is desirable.

* https://www.ssa.gov/history/reports/boskinrpt.html

* https://en.wikipedia.org/wiki/Boskin_Commission

Feel free to point out any errors in the methodology and logic that they used.

Here's a paper from 2006 to get you started:

> This paper provides a retrospective on the 1996 Boskin Commission Report, Toward a More Accurate Measure of the Cost of Living, and its famous estimate that the CPI in 1995-96 was upward biased by 1.1 percent per year. The paper summarizes the report's methods, findings, and recommendations, and then reviews the criticisms that appeared soon after the Report was issued. Post-Boskin changes in the CPI are summarized and assessed, as is recent research on related issues. The paper sharply distinguishes two questions. First, with what we know now, what should the Commission have concluded about CPI bias in 1995-96? Second, what is the bias now after the many improvements introduced into the CPI since the Commission's Report?

> About the first question, my own recent research on apparel and rental housing indicates a substantial downward bias in the CPI over much of the twentieth century, diminishing in size after 1985. Incorporating these findings into the Boskin matrix would reduce its 0.6 percent annual upward bias due to quality change and new products to a smaller 0.4 percent bias. However, this is more than offset by the stunning discrepancy over 2000-06 in the chain-weighted C-CPI-U compared to the traditional CPI-U, indicating that the Commission greatly understated the magnitude of upper-level substitution bias. This retrospective evaluation suggests that the Boskin bias estimate for 1995-96 should have been 1.2 to 1.3 percent, not 1.1 percent.

> Current upward bias in the CPI is estimated to have declined from the revised 1.2-1.3 percent in the Boskin era to about 0.8 percent today. Yet the Boskin report, like most contemporary studies of quality change, failed to place sufficient value on the value of new products and on increased longevity. Allowing for these, today's bias is at least 1.0 percent per year or perhaps even higher.

* https://www.nber.org/papers/w12311

You're right I guess. The price of gold is manipulated heavily by the banks so it is not a perfect measuring device. There is literally a Federal Reserve memo on Wikileaks describing how the government would create FUD about gold through the futures market. But the supply of it is nevertheless fairly constant compared to just about anything. People have remarked that an ounce of gold today buys about the same as it did thousands of years ago. I think they are right. The price of oil is clearly less stable than the price of gold. You could do better if you compared many goods in a basket, perhaps, but you just can't trust the government to do it right.

>perhaps. Seems fairly tangential, unless you're implying that governments generally tend to severely underreport inflation most of the time.

Yes that is exactly what I'm implying (or stating directly). I am mainly talking about the US government because I don't know how other governments calculate their rates, but it is probably about the same everywhere. I think in recent times you could do well by doubling their number.

The US government also misrepresents unemployment. For example, if an unemployed engineer gets a job at Starbucks one day a week while applying for a new gig, he is not counted as unemployed anymore. He is also not counted if he is unemployed for any longer than 6 months. Perhaps we need to report them all as unemployed along with the median time to get a job, and/or have a separate number for skilled workers that does not exclude them if they are forced to take an inadequate job.