6 ms·

What I don't understand is this 2% price target. Prices could go up 10% one year, and well call it a success if next year we "tame inflation" by only having our

by bko 3y ago

What I don't understand is this 2% price target. Prices could go up 10% one year, and well call it a success if next year we "tame inflation" by only having our prices go up 2%. Why can't we target to get prices back down? For those on a fixed income, this is money we lost forever. We expect (and see) some prices go down every year (mainly electronics) and it works fine. But god forbid the price of milk goes down a bit after rising 20% in two years.

TuringNYC 3y ago
>> What I don't understand is this 2% price target. It is statistical trickery and a headline number used to make people think things are OK. It is also a convenient number for COLA increase targets which make people think their incomes/pensions are going up (when effectively they are not on a real basis.) Also, as you note, we re-baseline each year and dont talk about the cumulative compounded inflation e.g., over the past 5yrs. Americans on fixed incomes (e.g., pension, social security) and those without wage elasticity (e.g., restaurant workers) are absolutely miserable right now because they are squeezed from both sides, even after modest wage increases in 2021/2022. This is not good for a Democracy.
- dublinben 3y ago
  Low wage workers have actually seen the most wage growth recently. https://www.epi.org/publication/swa-wages-2022/ https://www.epi.org/publication/swa-wages-2022/
  - TuringNYC 3y ago
    >> Low wage workers have actually seen the most wage growth recently. Yes and no(?) From the study "Real wage growth across the wage distribution, 2019–2022" shows 9% real wage growth. The "real" portion is compared to engineered inflation figures. In the day-to-day world where people pay actual prices, price increases have not be 2% or whatever CPI claims them to be, they are much worse. We can back into rosy numbers, but the real numbers are felt by people. I'd suggest speaking to a variety of people and see how they feel. Ensure to also speak to someone on social security income. I speak to my mom and see the numbers on a weekly basis.
- bagacrap 3y ago
  Restaurant workers are probably the biggest winners over the past three years. Their wages are a large component driving inflation.
  - WalterBright 3y ago
    The wage-price spiral is a myth. The cause of inflation is, as usual, the government running the printing press and printing "free" money. Then, the pesky Law of Supply and Demand devalues the extra money, which we call "inflation".
    - bagacrap 3y ago
      I didn't say anything about the wage price spiral. One category that has had above-average inflation is food away from home. That's mostly driven by wages of the workers, not wages of the clientele. The pesky law you mention is indeed the issue. Not enough people are willing to work in restaurants, and/or not enough people are willing to modify their habits to avoid eating in restaurants when the prices increase. Whether "printing" money was a cause of generalized inflation is a matter of debate. It's hard to argue it didn't have some effect, but I think you'd probably expect the inflation to have been worse if it were just dependent on the amount of dollars in the system. Given the tightness in the labor market and reduced workforce participation, it seems to me that the pandemic was a large-scale, impromptu test of the UBI, and society failed it very badly. Turns out people will actually not work if they don't have to, and robots are not yet prepared to pick up the slack.
      - WalterBright 3y ago
        > Whether "printing" money was a cause of generalized inflation is a matter of debate. It's only a debate for people who haven't looked at the history of money and inflation. Inflation is always the result of an increase in the supply of money relative to the value of goods and services in the economy. It happens when there are gold rushes, silver rushes, and running the government printing press. Our current inflation happened soon after a massive increase in deficit spending.
Mountain_Skies 3y ago
Some inflation is seen as good by economists because it pushes money that would sit on the sidelines into "productive" uses. It creates an incentive and a need for risk taking or stored wealth will be eaten away. That this doesn't align with most individual's goal is of no concern to those most interested in productivity and GDP growth.
- WalterBright 3y ago
  > Some inflation is seen as good by economists because it pushes money that would sit on the sidelines into "productive" uses. The ever-popular Scrooge McDuck cash vault theory. Nobody has a cash vault. Any "cash" is stored in banks, which loan it out into the economy. People who borrow money save/spend it.
sarchertech 3y ago
Between 2008 and 2018 milk prices went down from $3.80 a gallon to $2.90 [1]. So we're actually barely above 2008 prices in non-inflation adjusted dollars. To your specific point about targeting negative inflation, that's deflation, which most people believe is bad for the economy. Even if there are types of "good deflation", government policy inentionally targeting deflation would almost definitely be a bad thing. 1. https://www.usinflationcalculator.com/inflation/milk-prices-adjusted-for-inflation/ https://www.usinflationcalculator.com/inflation/milk-prices-...
FormerBandmate 3y ago
People get hired off the 2% because that’s a baseline level of growth. When the economy is in deflation people will constantly get fired every year, growth basically stops, and you end up with a highly risk averse Japan-type situation. This is a drastic oversimplification but that’s basically it
kec 3y ago
Deflation means a dollar tomorrow is always worth more than a dollar today meaning a rational person should strive to spend as little money today as possible. This eventually locks the entire economy up into a death spiral.
- grardb 3y ago
  I'm curious to know if this is a real phenomenon that has been observed. Would you be able to point me in the direction of resources to learn more about this? The reason for my skepticism is that even without deflation, a dollar tomorrow is usually worth more than a dollar today, yet tons of people* don't save or invest much/any of their money, even if they're able to. * I'm speaking from the perspective of an American FWIW.
  - nimbleplum40 3y ago
    > even without deflation, a dollar tomorrow is usually worth more than a dollar today No, that’s deflation. If you’re talking about investing, that’s different. The dollar is still worth less on its own. It just made extra dollars in the meantime.
  - graton 3y ago
    Japan had deflation. Can search for information on that. Many articles out there about it.
  - almost_usual 3y ago
    https://www.imf.org/external/pubs/ft/wp/2003/wp03215.pdf https://www.imf.org/external/pubs/ft/wp/2003/wp03215.pdf
  - jliptzin 3y ago
    A dollar tomorrow is worth less than it is today
    - karatinversion 3y ago
      Your local bank or credit union will trade your dollar today for more than a dollar tomorrow!
tmountain 3y ago
Governments are afraid of deflation (prices going down) because consumers can go into a holding pattern (stopping spending while waiting for prices to continue to decrease) which can cause the economy to stall out.
- rhyme-boss 3y ago
  Prices drop and people spend less? That's silly.
  - deleted 3y ago
    [deleted]
  - xwdv 3y ago
    It’s not silly. If you know prices are only going down you might hold off on buying that house or car until later because you know you’ll just get it cheaper.
    - cjbgkagh 3y ago
      Depends if you need a house or not, the idea that people are treating future consumption as an investment does not seem to hold much weight. In a competitive market others will be making a similar gamble meaning rents will be higher than normal due to increased demand, and the market will normalize.
  - nvalis 3y ago
    It's more people see prices dropping hence their money increase in relative value so they save up more instead of spending it.
    - rhyme-boss 3y ago
      It just reminds me how unserious economic theory is. You can tell any kind of story you want.
  - ferdowsi 3y ago
deleted 3y ago
[deleted]
slaymaker1907 3y ago
It’s because that’s called deflation and mainstream economics predicts that it is absolutely catastrophic to the economy, at least if it is seen generally across the whole economy. Obviously, individual goods can decrease in nominal price, but general deflation is thought to lead almost immediately to depressions and recessions.
- naijaboiler 3y ago
  Correct
em500 3y ago
Most of the other responses are missing the point of your question. You really asking why central banks don't engage in targeting the price level, rather than price changes (=inflation). In price level targeting, they'd aim for higher (lower) inflation next year if they under-(over-)shot their target this year. Academics and have studies the pros and cons. I don't have time to post summaries, but maybe someone else can step in: https://www.stlouisfed.org/-/media/project/frbstl/stlouisfed/files/pdfs/bullard/remarks/2018/bullard_cfa_stlouis_10_january_2018.pdf https://www.stlouisfed.org/-/media/project/frbstl/stlouisfed... https://www.ijcb.org/journal/ijcb2002_3.pdf https://www.ijcb.org/journal/ijcb2002_3.pdf
jliptzin 3y ago
You’re supposed to be getting raises to keep up with inflation. Inflation means rising cost of everything, including your labor. What is your source of a fixed income? Even social security has cost of living adjustments. If it’s an annuity, you can get annuities that vary based on changes to the CPI. If you put a lot of money into a fixed annuity years ago, you did not properly hedge interest rate/inflation risk.
- phone8675309 3y ago
  What you call "not getting a raise" is what companies called "getting a discount on labor"
  - jliptzin 3y ago
    Which is why laborers need to demand a higher wage to keep up with higher COL, like every other supplier in the economy would.
dragonwriter 3y ago
Stickiness of nominal wages means thaf deflation leads to more rapid downsizing in industries facing slowdowns (including transitoy ones), which is among the reasons that the Fed, faced with a dual mandate of price stability and promoting full employment, prefers small positive inflation. There's also reason to believe that deflation is more likely to be sticky once entrenched than inflation, because the knock-on effects produce more deflation. > For those on a fixed income, this is money we lost forever. Yes, that's a fundamental problem with fixed incomes and why minimum support programs don't tend to use fixed nominal benefits across time. Most people aren’t on fixed incomes, and if we tried to manage price levels around people on fixed incomes, not only would it be bad for everyone else, but it would also threaten the investments underlying the sources of those fixed incomes (which aren’t really fixed, because they can drop, including to 0.)

by bko 3y ago

TuringNYC 3y ago

>> What I don't understand is this 2% price target. It is statistical trickery and a headline number used to make people think things are OK. It is also a convenient number for COLA increase targets which make people think their incomes/pensions are going up (when effectively they are not on a real basis.) Also, as you note, we re-baseline each year and dont talk about the cumulative compounded inflation e.g., over the past 5yrs. Americans on fixed incomes (e.g., pension, social security) and those without wage elasticity (e.g., restaurant workers) are absolutely miserable right now because they are squeezed from both sides, even after modest wage increases in 2021/2022. This is not good for a Democracy.

dublinben 3y ago
Low wage workers have actually seen the most wage growth recently. https://www.epi.org/publication/swa-wages-2022/ https://www.epi.org/publication/swa-wages-2022/
- TuringNYC 3y ago
  >> Low wage workers have actually seen the most wage growth recently. Yes and no(?) From the study "Real wage growth across the wage distribution, 2019–2022" shows 9% real wage growth. The "real" portion is compared to engineered inflation figures. In the day-to-day world where people pay actual prices, price increases have not be 2% or whatever CPI claims them to be, they are much worse. We can back into rosy numbers, but the real numbers are felt by people. I'd suggest speaking to a variety of people and see how they feel. Ensure to also speak to someone on social security income. I speak to my mom and see the numbers on a weekly basis.
bagacrap 3y ago
Restaurant workers are probably the biggest winners over the past three years. Their wages are a large component driving inflation.
- WalterBright 3y ago
  The wage-price spiral is a myth. The cause of inflation is, as usual, the government running the printing press and printing "free" money. Then, the pesky Law of Supply and Demand devalues the extra money, which we call "inflation".
  - bagacrap 3y ago
    I didn't say anything about the wage price spiral. One category that has had above-average inflation is food away from home. That's mostly driven by wages of the workers, not wages of the clientele. The pesky law you mention is indeed the issue. Not enough people are willing to work in restaurants, and/or not enough people are willing to modify their habits to avoid eating in restaurants when the prices increase. Whether "printing" money was a cause of generalized inflation is a matter of debate. It's hard to argue it didn't have some effect, but I think you'd probably expect the inflation to have been worse if it were just dependent on the amount of dollars in the system. Given the tightness in the labor market and reduced workforce participation, it seems to me that the pandemic was a large-scale, impromptu test of the UBI, and society failed it very badly. Turns out people will actually not work if they don't have to, and robots are not yet prepared to pick up the slack.
    - WalterBright 3y ago
      > Whether "printing" money was a cause of generalized inflation is a matter of debate. It's only a debate for people who haven't looked at the history of money and inflation. Inflation is always the result of an increase in the supply of money relative to the value of goods and services in the economy. It happens when there are gold rushes, silver rushes, and running the government printing press. Our current inflation happened soon after a massive increase in deficit spending.

Mountain_Skies 3y ago

Some inflation is seen as good by economists because it pushes money that would sit on the sidelines into "productive" uses. It creates an incentive and a need for risk taking or stored wealth will be eaten away. That this doesn't align with most individual's goal is of no concern to those most interested in productivity and GDP growth.

WalterBright 3y ago
> Some inflation is seen as good by economists because it pushes money that would sit on the sidelines into "productive" uses. The ever-popular Scrooge McDuck cash vault theory. Nobody has a cash vault. Any "cash" is stored in banks, which loan it out into the economy. People who borrow money save/spend it.

sarchertech 3y ago

Between 2008 and 2018 milk prices went down from $3.80 a gallon to $2.90 [1]. So we're actually barely above 2008 prices in non-inflation adjusted dollars. To your specific point about targeting negative inflation, that's deflation, which most people believe is bad for the economy. Even if there are types of "good deflation", government policy inentionally targeting deflation would almost definitely be a bad thing. 1. https://www.usinflationcalculator.com/inflation/milk-prices-adjusted-for-inflation/ https://www.usinflationcalculator.com/inflation/milk-prices-...

FormerBandmate 3y ago

People get hired off the 2% because that’s a baseline level of growth. When the economy is in deflation people will constantly get fired every year, growth basically stops, and you end up with a highly risk averse Japan-type situation. This is a drastic oversimplification but that’s basically it

kec 3y ago

Deflation means a dollar tomorrow is always worth more than a dollar today meaning a rational person should strive to spend as little money today as possible. This eventually locks the entire economy up into a death spiral.

grardb 3y ago
I'm curious to know if this is a real phenomenon that has been observed. Would you be able to point me in the direction of resources to learn more about this? The reason for my skepticism is that even without deflation, a dollar tomorrow is usually worth more than a dollar today, yet tons of people* don't save or invest much/any of their money, even if they're able to. * I'm speaking from the perspective of an American FWIW.
- nimbleplum40 3y ago
  > even without deflation, a dollar tomorrow is usually worth more than a dollar today No, that’s deflation. If you’re talking about investing, that’s different. The dollar is still worth less on its own. It just made extra dollars in the meantime.
- graton 3y ago
  Japan had deflation. Can search for information on that. Many articles out there about it.
- almost_usual 3y ago
  https://www.imf.org/external/pubs/ft/wp/2003/wp03215.pdf https://www.imf.org/external/pubs/ft/wp/2003/wp03215.pdf
- jliptzin 3y ago
  A dollar tomorrow is worth less than it is today
  - karatinversion 3y ago
    Your local bank or credit union will trade your dollar today for more than a dollar tomorrow!

tmountain 3y ago

Governments are afraid of deflation (prices going down) because consumers can go into a holding pattern (stopping spending while waiting for prices to continue to decrease) which can cause the economy to stall out.

rhyme-boss 3y ago
Prices drop and people spend less? That's silly.
- deleted 3y ago
  [deleted]
- xwdv 3y ago
  It’s not silly. If you know prices are only going down you might hold off on buying that house or car until later because you know you’ll just get it cheaper.
  - cjbgkagh 3y ago
    Depends if you need a house or not, the idea that people are treating future consumption as an investment does not seem to hold much weight. In a competitive market others will be making a similar gamble meaning rents will be higher than normal due to increased demand, and the market will normalize.
- nvalis 3y ago
  It's more people see prices dropping hence their money increase in relative value so they save up more instead of spending it.
  - rhyme-boss 3y ago
    It just reminds me how unserious economic theory is. You can tell any kind of story you want.
- ferdowsi 3y ago

deleted 3y ago

[deleted]

slaymaker1907 3y ago

It’s because that’s called deflation and mainstream economics predicts that it is absolutely catastrophic to the economy, at least if it is seen generally across the whole economy. Obviously, individual goods can decrease in nominal price, but general deflation is thought to lead almost immediately to depressions and recessions.

naijaboiler 3y ago
Correct

em500 3y ago

Most of the other responses are missing the point of your question. You really asking why central banks don't engage in targeting the price level, rather than price changes (=inflation). In price level targeting, they'd aim for higher (lower) inflation next year if they under-(over-)shot their target this year. Academics and have studies the pros and cons. I don't have time to post summaries, but maybe someone else can step in: https://www.stlouisfed.org/-/media/project/frbstl/stlouisfed/files/pdfs/bullard/remarks/2018/bullard_cfa_stlouis_10_january_2018.pdf https://www.stlouisfed.org/-/media/project/frbstl/stlouisfed... https://www.ijcb.org/journal/ijcb2002_3.pdf https://www.ijcb.org/journal/ijcb2002_3.pdf

jliptzin 3y ago

You’re supposed to be getting raises to keep up with inflation. Inflation means rising cost of everything, including your labor. What is your source of a fixed income? Even social security has cost of living adjustments. If it’s an annuity, you can get annuities that vary based on changes to the CPI. If you put a lot of money into a fixed annuity years ago, you did not properly hedge interest rate/inflation risk.

phone8675309 3y ago
What you call "not getting a raise" is what companies called "getting a discount on labor"
- jliptzin 3y ago
  Which is why laborers need to demand a higher wage to keep up with higher COL, like every other supplier in the economy would.

dragonwriter 3y ago

Stickiness of nominal wages means thaf deflation leads to more rapid downsizing in industries facing slowdowns (including transitoy ones), which is among the reasons that the Fed, faced with a dual mandate of price stability and promoting full employment, prefers small positive inflation. There's also reason to believe that deflation is more likely to be sticky once entrenched than inflation, because the knock-on effects produce more deflation. > For those on a fixed income, this is money we lost forever. Yes, that's a fundamental problem with fixed incomes and why minimum support programs don't tend to use fixed nominal benefits across time. Most people aren’t on fixed incomes, and if we tried to manage price levels around people on fixed incomes, not only would it be bad for everyone else, but it would also threaten the investments underlying the sources of those fixed incomes (which aren’t really fixed, because they can drop, including to 0.)