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Why the 2% inflation target? (2023)

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

#531

Post by sob727 »

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…

You are absolutely correct that the BLS publishes CPI, but this still happened in the Greenspan era (and that's what I meant by "under Greenspan"). I remember reading (IIRC, in Bill Fleckenstein's book), that the Boskin commission was not free of interference and/or had an intent going in.

Either way, especially in recent years, it's pretty clear that CPI has been a flawed metric. I remember this episode fondly: https://www.wsj.com/articles/SB10001424052748704893604576199...

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

#532

Post by jonplackett »

dlp211 wrote: post #431
jonplackett wrote: post #290

Earlier quoted context omitted.

They’re making a valid point, don’t shout them down by calling it a one off. Quality of living is plummeting and inflation on things you actually care about is way more than the headline rate. Housing, for example takes up a vast proportion of income and the increase has been way over inflation. I don’t think it’s headline news to state that the headline rate of inflation is not all that reflective of reality.

> Quality of living is plummeting Massive citation needed.

Go ask literally anyone you know that doesn’t work in tech and isn’t rich.

Or read any one of many articles about it.

https://www.theguardian.com/business/2022/jul/19/uk-living-s...

https://www.theguardian.com/business/2022/nov/17/obr-confirm...

https://www.cnbc.com/id/44962589

https://www.economist.com/graphic-detail/2022/09/08/global-l...

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

#533

Post by vwkd »

dopylitty wrote: post #51

I would ask a different question. Why combine a bunch of prices into an opaque number and call it "inflation"? I'd argue that doing so masks the true causes of price rises. Prices go up because companies make the choice to raise their prices. Sometimes this is because their own inputs became more expensive but in many more cases it's because the people running the company want to increase profits. By hiding the choic…

> but in many more cases it's because the people running the company want to increase profits

source?

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

#534

Post by georgeplusplus »

ajross wrote: post #530
georgeplusplus wrote: post #523

Earlier quoted context omitted.

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…

What number do you consider "not small", and do to promise to reconsider your priors when it's reached? The doom slinging on this issue really is getting ridiculous. People picked their rhetoric based on an assumption of 8-9% a year ago (for baldly partisan reasons) and are refusing to reconsider when it turned out the doom didn't arrive.

Its not doom slinging.

They have a target and even with all the raises they have done they cannot hit that target as banks are clearly under stress or they would raise more. This should come across as odd to you.

The historical norm has been the 2% benchmark and the onus should be on the fed to get there.

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

#535

Post by derangedHorse »

itsoktocry wrote: post #280
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…

> 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…

What do you mean "Society has become significantly wealthier"? When I think of wealth I think of an individual's assets to liabilities. If we look at the total value of an individual's assets with respect to the labor it can purchase, I don't think society has gotten all that wealthier. Maybe you're conflating quality of life with wealth?

Better quality and more abundant goods with decreasing marginalized labor costs is what we should expect since technology is naturally deflationary. If anything, the oddity is that food prices ever increase over time when quality is stagnant. The book "The Price of Tomorrow" does a good job giving a perspective on this.

There's also the problem of misguided/fraudulent capital investment which is when governments and corporations raise costs under the guise of technological improvements. This is when they say they add in extra processes for quality when they're really just lining their pockets. Think medical schools and doctors (https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6288618/), the FDA processes(https://en.wikipedia.org/wiki/Criticism_of_the_Food_and_Drug...), etc.

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

#536

Post by rhelz »

ponow wrote: post #516
rhelz wrote: post #386

Earlier quoted context omitted.

> If the transition to a deflationary economy is slow and planned, If your money is guaranteed to grow in value--and without the risk of actually investing it--that would starve the economy of investment, which would reduce economic growth. People would hold back on their consumption (why buy it today, when tomorrow it will be cheaper??), further reducing demand, which would further depress prices, etc in a doom cycl…

We should use debt only as much as necessary. Normalization, promotion, even subsidy of debt leads people to make poorer choices and to think in the short term. It destabilizes the world, and sets up traps for the many naive people, traps that benefit lenders.

Well, an influx of money can be a bad thing too: 1/3rd of lottery winners go bankrupt within 5 years of winning...I knew somebody who gave their kid a sports car on his 16th birthday...a week later he and his car were pulled out from under a semi truck...

Whether something is good or bad depends on how well or how poorly you use it. Its not intrinsically good or bad.

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

#537

Post by dventimi »

FactKnower69 wrote: post #237
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…

>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…

This is backward. Workers' benefit from (wage) inflation. The rich do not.

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

#538

Post by graeme »

ponow wrote: post #502
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…

Why should firms get a free 2% cut in salaries paid? Generally, firms are in a stronger negotiating position about salary, especially for the lowest skill labor and poorest people. If there's a downturn, then everyone will have to tighten belts, and firms can make that case to employees. Making a real 2% salary cut the universal default is cruel, and if your typical hourly wage-earner understood clearly the choice be…

You’re imagining every firm gets 2% savings every year. That isn’t how it works.

Most firms have rising real wages: real wages rose during the 2% inflation period.

But sometimes a firm needs to lower costs. Having a small bit of inflation lets a firm do so without either firing people or actually cutting nominal wages.

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

#540

Post by ajross »

georgeplusplus wrote: post #534
ajross wrote: post #530

Earlier quoted context omitted.

What number do you consider "not small", and do to promise to reconsider your priors when it's reached? The doom slinging on this issue really is getting ridiculous. People picked their rhetoric based on an assumption of 8-9% a year ago (for baldly partisan reasons) and are refusing to reconsider when it turned out the doom didn't arrive.

Its not doom slinging. They have a target and even with all the raises they have done they cannot hit that target as banks are clearly under stress or they would raise more. This should come across as odd to you. The historical norm has been the 2% benchmark and the onus should be on the fed to get there.

That's precisely doom slinging. "Banks are clearly under stress" is just ridiculous on it's face. And "historical norm" was literally and clearly refused upthread. What are you citing?
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