It’s Fed Day (again) and while inflation is settling down in most countries, we are facing an increasing debate if the 2% inflation target most Western central banks aim for is achievable going forward.
If similarly, one asked folks what level of unemployment they found tolerable, I suppose a majority would say zero percent. So they live in la-la land, thinking zero inflation with zero unemployment is even in the realm of the conceivable. Infantile voters enable demagogues.
I would say that central banks are the ones that do not know what inflation is :). Individuals experience inflation in direct terms: how living expenses move relative to their revenues (that is, their wages) to impact their welfare. I would postulate that the trend in a metric like the ratio of consumer prices / nominal wage index might be an effective way of measuring actual sensitivity of the populace in practical terms. The rate is too high or too low when it hurts. Studies asking citizens questions on what level of inflation (or deflation) is optimal seem a disingenuous exercise given that the wonks in the ivory towers cannot decide this amongst themselves [not to long ago in the US the target was assumed 0%, now it is 2%, and there is even a minority that calls for continued slow deflation].
Well, you might be right. The problem is if you want to manage the economy and keep it from dropping into crisis, you need to use a universal approach. Yes, CPI is an approximation of the 'average' experience, but to use what people 'perceive inflation' to be as a yard stick seems inherently flawed. I guess I simply don't trust the average person to be particularly competent...
To quote George Carlin: "Think about how stupid the average person is, then realise that half the population is even stupider than that".
Inflation is imprecise in measurement, difficult to control, and affects different people & businesses in different ways.
Imprecise: the CPI (US or UK), RPI, etc measure different goods & services.
Control: just look at Fed & BoE forecasts and the later outcomes. Central Banks can only influence inflation with the ‘blunt instrument’ of Interest Rates. Government fiscal activity - high tax/ low borrow -v- high public expenditure/ high borrow has effects which can be contrary (as now).
Effect: 2009 -21 ZIRP was good for CPI, bad for wage earners, but wonderful for asset holders (land & investments).
Target: Why 2%? It was chosen artificially based on a New Zealand academic.
The future: History pre 2009 suggests a ‘normal inflation rate is 3-4%. If you can forecast accurately inflation in 2026 or 2028 you are cleverer than most. It all depends; and would 3% be so awful? Better that and stability than the last year or so.
The public wants their pay to go up faster than the price of goods, especially ones where they clearly see the price like gasoline or groceries. The public likes to see the value of their assets (houses, stocks, etc.) go up but they don't want to pay more for them. So falling prices are good when they are paying for the item, but not good if they own the item as an investment. Falling wages are not good even if prices are falling faster.
Basically, the major central bank blunders occur when the relationships between prices and wages change pattern so the person on the street notices it in a big way. A steady pay raise of 2% per year with prices going up 2% a year is what people would consider acceptable. A 3% pay raise with prices going up 2% is much better.
2020-22 tossed all these relationships up in the air and just let them flutter down randomly. People don't like that.
"My research indicates that in the Eurozone and the UK, we should expect inflation to average somewhere around 2.5-3%, and in the US somewhere around 2-2.5%." Why this difference?
The point about real incomes is key. Real incomes fell in the US in 2021 and 2022, which partly explains the sour mood. It redistributes income to smart, wealthy, powerful people who can adjust their situation, which most people can not. The unhappiness also comes from needing to constantly watch prices; the burden of attention is incrementally toughest on those whose budgets are already most precarious. Economists add insult to injury by trying to ignore prices because of that same volatility that demands constant attention. Such as food, energy and transportation. And other large parts of the budget such as rent or cost of housing.
I subscribed, even though I already have way too many subscriptions to keep up, just to ask this one naïve question: Why can't we all agree that the ideal rate of inflation is 0? Anything higher is larceny.
There's one more ace up the Central Bankers sleeve to manage expectations, that is the time window inflation target / measurements are averaged ;)
In the US yes, but not in Europe.
Thank you so much for abbrevsting the Federal Reserve as "Fed" and not erroneously as "FED" as some do, as if it's an acronym such as the ECB.
If similarly, one asked folks what level of unemployment they found tolerable, I suppose a majority would say zero percent. So they live in la-la land, thinking zero inflation with zero unemployment is even in the realm of the conceivable. Infantile voters enable demagogues.
I know. Why can't they just do what they're told by those that understand the higher order?
I would say that central banks are the ones that do not know what inflation is :). Individuals experience inflation in direct terms: how living expenses move relative to their revenues (that is, their wages) to impact their welfare. I would postulate that the trend in a metric like the ratio of consumer prices / nominal wage index might be an effective way of measuring actual sensitivity of the populace in practical terms. The rate is too high or too low when it hurts. Studies asking citizens questions on what level of inflation (or deflation) is optimal seem a disingenuous exercise given that the wonks in the ivory towers cannot decide this amongst themselves [not to long ago in the US the target was assumed 0%, now it is 2%, and there is even a minority that calls for continued slow deflation].
Well, you might be right. The problem is if you want to manage the economy and keep it from dropping into crisis, you need to use a universal approach. Yes, CPI is an approximation of the 'average' experience, but to use what people 'perceive inflation' to be as a yard stick seems inherently flawed. I guess I simply don't trust the average person to be particularly competent...
To quote George Carlin: "Think about how stupid the average person is, then realise that half the population is even stupider than that".
Inflation is imprecise in measurement, difficult to control, and affects different people & businesses in different ways.
Imprecise: the CPI (US or UK), RPI, etc measure different goods & services.
Control: just look at Fed & BoE forecasts and the later outcomes. Central Banks can only influence inflation with the ‘blunt instrument’ of Interest Rates. Government fiscal activity - high tax/ low borrow -v- high public expenditure/ high borrow has effects which can be contrary (as now).
Effect: 2009 -21 ZIRP was good for CPI, bad for wage earners, but wonderful for asset holders (land & investments).
Target: Why 2%? It was chosen artificially based on a New Zealand academic.
The future: History pre 2009 suggests a ‘normal inflation rate is 3-4%. If you can forecast accurately inflation in 2026 or 2028 you are cleverer than most. It all depends; and would 3% be so awful? Better that and stability than the last year or so.
The public wants their pay to go up faster than the price of goods, especially ones where they clearly see the price like gasoline or groceries. The public likes to see the value of their assets (houses, stocks, etc.) go up but they don't want to pay more for them. So falling prices are good when they are paying for the item, but not good if they own the item as an investment. Falling wages are not good even if prices are falling faster.
Basically, the major central bank blunders occur when the relationships between prices and wages change pattern so the person on the street notices it in a big way. A steady pay raise of 2% per year with prices going up 2% a year is what people would consider acceptable. A 3% pay raise with prices going up 2% is much better.
2020-22 tossed all these relationships up in the air and just let them flutter down randomly. People don't like that.
"My research indicates that in the Eurozone and the UK, we should expect inflation to average somewhere around 2.5-3%, and in the US somewhere around 2-2.5%." Why this difference?
The US has better demographics and is less impacted by decoupling of global supply chains.
The point about real incomes is key. Real incomes fell in the US in 2021 and 2022, which partly explains the sour mood. It redistributes income to smart, wealthy, powerful people who can adjust their situation, which most people can not. The unhappiness also comes from needing to constantly watch prices; the burden of attention is incrementally toughest on those whose budgets are already most precarious. Economists add insult to injury by trying to ignore prices because of that same volatility that demands constant attention. Such as food, energy and transportation. And other large parts of the budget such as rent or cost of housing.
Thanks for your reply.
I suggest this lecture about what's boiling under the surface, potentially affecting inflation too
https://www.understandingai.org/p/the-case-forand-againstrapid-ai-driven?utm_source=post-email-title&publication_id=1501429&post_id=141185250&utm_campaign=email-post-title&isFreemail=true&r=1f288a&utm_medium=email
I subscribed, even though I already have way too many subscriptions to keep up, just to ask this one naïve question: Why can't we all agree that the ideal rate of inflation is 0? Anything higher is larceny.