7 ms·

2% is good, anything over 3% is not good, anything over 4% is bad, 5% and higher is really bad. Hope that clears things up for you.

by hadlock 4mo ago

embedding-shape 4mo ago
Can you really say that based only on the inflation? What if wages increased 6%, then 3% inflation wouldn't be as bad as if inflation raised 2% but wages only increased 0.1%? At least if you think about purchasing power I suppose. But won't claim to be an expert on this, happy to be educated by those who are :)
- anticorporate 4mo ago
  In general, higher inflation has a negative impact on consumer sentiment even if wage growth matches the inflation, which it rarely does. But the bigger issue is that inflation is generally distributed much more evenly than wage increases. Very few employers offer a COLA that is automatic, so wages almost always trail inflationary pressure.
- recursivecaveat 4mo ago
  Part of it is just expectations btw. If the value of money is jumping up and down rapidly it is bad for business. Like if I'm going to sell you a 30 year fixed rate mortgage we require an accurate expectation of future inflation for one of us not to effectively lose their shirt on the deal. Imagine shops shuffling their prices up and down constantly, unions renegotiating contracts all the time, you sign up for 12 months of netflix but the price implicitly assumes that money will be worth N% less by month 12, etc. (imo a lot of these things should already be pegged, but people don't like doing that) It's basically just much more annoying to transact using a currency whose future value is unpredictable. So given that 2% is the stated target, which expectations are presumably largely built around, significant deviation is a failure to manage that process.
kachnuv_ocasek 4mo ago
Why those arbitrary thresholds?
- horsawlarway 4mo ago
  In complete seriousness: An offhand remark made by New Zealand's Finance Minister, Roger Douglas, during a 1988 television interview.
- hadlock 4mo ago
  The fed has a dual mandate to maintain full employment and keep inflation at 2%. Others have already explained why 2% and not 0%. Up to 3% is expected, 4% means significant price shocks and they should consider acting quickly. 5% means they are at risk of losing control of inflation as it's more than doubled from their mandate and the fed risks losing credibility with markets
- JumpCrisscross 4mo ago
  > Why those arbitrary thresholds? The broad idea is you want a number low enough that people don't price inflation expectations into day-to-day pricing but not so low that a hiccup causes deflation. The empirical evidence around inflation persistence is a bit all over the place, but broadly suggests people start daily indexing between 2 and 5%. When that starts to happen, restraining inflation without causing a depression becomes incredibly hard, because people will actively countermand policy moves.
tastyfreeze 4mo ago
The FED says that 2% is good. 2% is not good. Their target of 2% per year means we have 2% compounding annually devaluation of our currency.
- HDThoreaun 4mo ago
  Why is that not good? When inflation is close to 0 real interest rates increase which causes the economy to slow down. It seems clear to me that the optimal rate of inflation is always above 0.
  - dmoy 4mo ago
    The real problem imo is that below 0% is really bad, and has the potential to spiral. So the fed does not target anything close to 0%, but instead targets some buffer above it. So it's not that "2% is good", but more that "2% is the best buffer we've decided above the <0% super scary threshold"
    - HDThoreaun 4mo ago
      Yes of course below 0% is especially bad, but I dont think thats the whole story. If central banks were able to set inflation with 100% certainty I still think targeting a number close to 0% is a bad idea. Nominal interest rates have a floor due to defaults, servicing costs. As inflation approaches 0 that floor is hit and monetary policy loses its ability to control real interest rates. Keeping nominal rates above their floor is key to ensuring small business can obtain liquidity, as the floor is approached it makes less sense for lenders to write small loans. There are many other reasons a positive inflation rate is better than substantially near 0. One common complaint about inflation is that erodes real wages because nominal wages are sticky, but this is actually a good thing. It gives businesses room to breathe during downturns without cutting nominal wages or having to cut staff. Positive inflation also forces cash into productive uses which helps monetary policy because it keeps the actaul money supply more stable.
  - somenameforme 4mo ago
    The Fed did a study some time back estimating CPI levels since 1800. [1] They found that from 1800 to 1950 the CPI never shifted more than 25 points from the starting base of 51, so it always stayed within +/- ~50% of that baseline. That's through the Civil War, both World Wars, Spanish Flu, and much more. And obviously the US economy increased in sized quite exponentially from 1800 to 1950, with no persistent inflation whatsoever. It's even more interesting to contrast this from 1971 onward. 1971 is when Bretton Woods ended and the government was given a free hand to start 'printing money' so to speak, and inflation became the new policy. Since then the CPI has increased by more than 800 points, 1600% more than our baseline. And it's only increasing faster now - to the point that these numbers I'm giving are already rather outdated. [1] - https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1800- https://www.minneapolisfed.org/about-us/monetary-policy/infl...
neves 4mo ago
It depends on the country. Brazil, due to its hyperinflation days, has a lot of indexed prices. These are prices that automatically increase due to inflation. This makes the country to have so called inertial inflation, current inflation caused by past inflation, and also makes it more robust to a higher inflation.

2% is good, anything over 3% is not good, anything over 4% is bad, 5% and higher is really bad. Hope that clears things up for you.

by hadlock 4mo ago

2% is good, anything over 3% is not good, anything over 4% is bad, 5% and higher is really bad. Hope that clears things up for you.

embedding-shape 4mo ago

Can you really say that based only on the inflation? What if wages increased 6%, then 3% inflation wouldn't be as bad as if inflation raised 2% but wages only increased 0.1%? At least if you think about purchasing power I suppose. But won't claim to be an expert on this, happy to be educated by those who are :)

anticorporate 4mo ago
In general, higher inflation has a negative impact on consumer sentiment even if wage growth matches the inflation, which it rarely does. But the bigger issue is that inflation is generally distributed much more evenly than wage increases. Very few employers offer a COLA that is automatic, so wages almost always trail inflationary pressure.
recursivecaveat 4mo ago
Part of it is just expectations btw. If the value of money is jumping up and down rapidly it is bad for business. Like if I'm going to sell you a 30 year fixed rate mortgage we require an accurate expectation of future inflation for one of us not to effectively lose their shirt on the deal. Imagine shops shuffling their prices up and down constantly, unions renegotiating contracts all the time, you sign up for 12 months of netflix but the price implicitly assumes that money will be worth N% less by month 12, etc. (imo a lot of these things should already be pegged, but people don't like doing that) It's basically just much more annoying to transact using a currency whose future value is unpredictable. So given that 2% is the stated target, which expectations are presumably largely built around, significant deviation is a failure to manage that process.

kachnuv_ocasek 4mo ago

Why those arbitrary thresholds?

horsawlarway 4mo ago
In complete seriousness: An offhand remark made by New Zealand's Finance Minister, Roger Douglas, during a 1988 television interview.
hadlock 4mo ago
The fed has a dual mandate to maintain full employment and keep inflation at 2%. Others have already explained why 2% and not 0%. Up to 3% is expected, 4% means significant price shocks and they should consider acting quickly. 5% means they are at risk of losing control of inflation as it's more than doubled from their mandate and the fed risks losing credibility with markets
JumpCrisscross 4mo ago
> Why those arbitrary thresholds? The broad idea is you want a number low enough that people don't price inflation expectations into day-to-day pricing but not so low that a hiccup causes deflation. The empirical evidence around inflation persistence is a bit all over the place, but broadly suggests people start daily indexing between 2 and 5%. When that starts to happen, restraining inflation without causing a depression becomes incredibly hard, because people will actively countermand policy moves.

tastyfreeze 4mo ago

The FED says that 2% is good. 2% is not good. Their target of 2% per year means we have 2% compounding annually devaluation of our currency.

HDThoreaun 4mo ago
Why is that not good? When inflation is close to 0 real interest rates increase which causes the economy to slow down. It seems clear to me that the optimal rate of inflation is always above 0.
- dmoy 4mo ago
  The real problem imo is that below 0% is really bad, and has the potential to spiral. So the fed does not target anything close to 0%, but instead targets some buffer above it. So it's not that "2% is good", but more that "2% is the best buffer we've decided above the <0% super scary threshold"
  - HDThoreaun 4mo ago
    Yes of course below 0% is especially bad, but I dont think thats the whole story. If central banks were able to set inflation with 100% certainty I still think targeting a number close to 0% is a bad idea. Nominal interest rates have a floor due to defaults, servicing costs. As inflation approaches 0 that floor is hit and monetary policy loses its ability to control real interest rates. Keeping nominal rates above their floor is key to ensuring small business can obtain liquidity, as the floor is approached it makes less sense for lenders to write small loans. There are many other reasons a positive inflation rate is better than substantially near 0. One common complaint about inflation is that erodes real wages because nominal wages are sticky, but this is actually a good thing. It gives businesses room to breathe during downturns without cutting nominal wages or having to cut staff. Positive inflation also forces cash into productive uses which helps monetary policy because it keeps the actaul money supply more stable.
- somenameforme 4mo ago
  The Fed did a study some time back estimating CPI levels since 1800. [1] They found that from 1800 to 1950 the CPI never shifted more than 25 points from the starting base of 51, so it always stayed within +/- ~50% of that baseline. That's through the Civil War, both World Wars, Spanish Flu, and much more. And obviously the US economy increased in sized quite exponentially from 1800 to 1950, with no persistent inflation whatsoever. It's even more interesting to contrast this from 1971 onward. 1971 is when Bretton Woods ended and the government was given a free hand to start 'printing money' so to speak, and inflation became the new policy. Since then the CPI has increased by more than 800 points, 1600% more than our baseline. And it's only increasing faster now - to the point that these numbers I'm giving are already rather outdated. [1] - https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1800- https://www.minneapolisfed.org/about-us/monetary-policy/infl...

neves 4mo ago

It depends on the country. Brazil, due to its hyperinflation days, has a lot of indexed prices. These are prices that automatically increase due to inflation. This makes the country to have so called inertial inflation, current inflation caused by past inflation, and also makes it more robust to a higher inflation.