Inflation “target” should be 0% that is - stable prices. The EU’s mandate is to keep it under 2% as a sort of safe margin that countries can go above 0 from time to time as natuarl adjustments. But at no stage should it be policy to try to get as close to 2% above or below as possible. Yet that seems to be how it is interpreted.
It’s kinda like them saying that 4% unemployment is full employment. In a sense it is due to people chaning jobs and those who simply won’t or can’t get a job etc etc, but that is no reason why we shouldn’t aim for 0% of people being unemployed.
Even if we accept 2% as a realistic margin, we should still be aiming for 0% if price stability is the real aim.
Thats incorrect. The official policy is “close to but not above 2%”.
In other words, the target is not 0% with a 2% error margin. The policy is to actually have 2% inflation every year. Bad for savers and workers with no bargaining power, but good for banks, the financial sector, employers, and the government.
Not really. Banks have to take a bet on expected inflation when they set fixed term interest rates - they have to allow for margin, costs, and depreciation (inflation).
Employers are stuck with having to renegotiate every year with employees for whom the cost of living is going up, when the employer may structurally be in a declining income industry - think of Dell, for example, with Irish employees experiencing large increases in costs each year, but Dell’s prices they achieve for each product being driven down (by Moores’ law if nothing else).
The government is, at heart, an employer. Increments are the bane of its life, but it has to do them universally or be seen to be unfair. Hence we have the situation where a long-serving orderly in a hospital could earn more than a newly qualified garda on the beat (for a public sector example) or a first officer on the world’s biggest airline.
For the financial sector, I don’t doubt you. The fear inflation creates drives people to choose products that guarantee them a return above it. This is a rich source of fees. If you could be guaranteed that your money would stay constant over time on deposit with the ECB, would you take it? The problem is, though, your needs over time would change, so your specific inflation basket would also change. The biggest increase in costs in recent years has been in health, medicines and personal care… all things that affect the you more as you get older.
Haver another look at my post. Essentially, price stability should mean a target of 0% with a margin for error. However, this is currently being interpreted as being a target of 2%. If you treat 2% as the target, it doesn’t raise too many eyebrows when one small country is running 5% inflation for a number of years and calling it stability.
Or, to put it another way, if they were really interested in price stability they would aim for 0, but 2% is a compromise between price stability and the flexibility needed for infinite growth.
So now you have two different economists(Blanchflower in my article) suggesting that the goal posts be moved,no conspiracy there then.Merely floating the idea so that having read about it in the papers,the sheeple are not too shocked when it actually happens.
First the PIIGS bailouts,now the inflation target potentially doubling in one fell swoop.
All the people who said the ECB would ensure its inflation fighting credentials would never be compromised must be getting nervous now.
The ECB has been set up to do one thing and one thing only - price stability. A measured inflation rate of 0% would actually be deflation (which is clearly not price stability), due to how badly inflation is measured (quality and substitution biases in particular.
We know the bias is somewhere probably above 1% a year, so keeping inflation in the 1.5-1.8% range is the most exact we can be!
So johnnyskeleton, the target should be 1.5-1.8% for price stability, and HoardAndSurvive, anything less is bad for borrowers and thus very bad for modern capital-based economies.
To be specific you are talking about CPI inflation rather than just inflation which strictly speaking is growth in money supply. You can’t have a fiat currency where there is not inflation (growth in M1, M2, M3) as you would have decrease in GDP (a recession). You can’t have money supply growth without a certain amount of CPI inflation. Hence M3 growth target of circa 4.5% yoy and CPI inflation of circa 2% yoy.
Of course nobody measures asset bubbles such as property or share markets which is where things go tend to go awry and lead to problems and instability that we currently have.
There’s also the related trade off (negative relationship) with unemployment. The lower inflation the higher unemployment. The Phillips Curve might be old enough at this stage but since 1999 has been remodeled as the New Keynesian Phillips Curve.
Economists just don’t seem to get history. You just can’t plug in a different variable amount for inflation and expect it to change everything else. It is the grossest of mis-logic as far as I can see. What they seem to be saying is:
interest rates were too low in the past
what would have made them high?
hey, high inflation is usually accompanied by high interest rates
therefore if inflation was higher, interest rates would have been too
And all so they can use the only tool in their monetarist box - interest rates. They are attempt to shape the historical debate to look like an inflation-nail so they can hit it with their interest rate-hammer. Why? Just so they can run around the other side and hammer the nail out in the current recession (more room to cut!).
Now, I am not the brightest spark in the bonfire of the vanities, but to my mind the only ways we might have had higher inflation in the past would be:
raise inflation expectations
when inflation threatens, don’t raise interest rates
keep interest rates lower than they should be for a long time
Which is exactly what we had. A huge global bubble-farting machine.
We have lived in a world of unparallelled technological and manufacturing progress. When I was a lad, you bought a record player. It might last you ten years of playing stereo records. It was largely unchanged from a gramophone. The wireless was basically the same as it had been in the 1930s. Even television had moved to colour, but not much else. Computers filled rooms (big rooms). If you had a washing machine, you told it to do one thing. When it had finished the one thing (the timer that you also set went off), you told it to do the next thing. Wash, rinse, spin, all separate actions.
All these old things have been swept away in the last twenty-five years. Not once, but many times. Not only that, but the relative price of these things (compared to earnings) has dropped hugely. Even before the China-thing, the cost was dropping. Now with the China thing, it is barely perceptible. This great leap forward should have been profoundly deflationary. And that should have been just fine because we are getting more for our money.
So what do my two contrary positions show? One that a deflator has been used to suppress inflation stats and the other that we should have had deflation? To me it shows we are counting the wrong things. Just as books are not a central part of inflation calculations, so TVs, iPees, even home computers, should not be either. What should be counted is wage increases, housing, health, ‘food’, government charges, maybe, but the gaming of the statistics and the nonsensical abuse of the price of money that is its reaction is part of the problem, not part of the solution.
Point taken, but would you accept a quick revision to be that the target should be a theoretical 0% inflation, even if in practice this measures at 1.5-1.8%? Over the long term, I believe that the statistical anomalies would correct themselves i.e. you’re paying an average of 30c for a mars bar every year for 10 years, this will register as 0%, even if the shorter term measurements show inflation. Is that not, in theory anyway (as I don’t think it has happened in practice), how actual price stability would manifest?
My limited understanding (which I’m happy to be corrected on) is that inflation and growth in money supply are two separate things. You can have an increase in the money supply which, if coupled with an equal increase in productivity will not result in any inflation as inflation only arises when there is more money than goods. Equally, you can have a decrease in the money supply which, if there is a greater reduction in productivity, will actually be inflationary as the level of goods and services is lower than the available money.
There are also a number of micro economic factors which make pure price stability impossible (the good kind, such as YM’s reference to Moore’s law in computers and the bad kind such as asset bubbles).
I sometimes think of inflation as the grease between the wheels - too much grease and there is no traction, too little grease and the gears get locked. But in theory (as in something that we should be aiming for rather than something we might actually achieve) a stable currency with prices remaining fairly constant throughout time is a prefereable ideal than a money churning machine where prices always go up to infinity and whenever it gets too hard to keep track of the numbers just lop off a few zeros.
I also think that inflation isn’t talked about enough given how important it is, and it is equally very often misunderstood by the likes of myself. It’s not for a want of trying on my part, it’s just that there don’t seem to be any easy answers when it comes to inflation.
I couldn’t agree more. Unfortunately, I think there are too many searches for easy answers, such as M. Blanchard’s above. Complicated to count? We’ll discount it. Target making the sums wrong? Change the target. Rate looks a bit high? Change the components. Rate looks a bit low? Charge people for productivity improvements.
In any case, it is going to have to be a much more flexible concept than it has been in the past. We are going to have to accept bouts of high inflation and bouts of deflation in a globalised world (as pressure for resources ebbs and flows and supply of goods/cost of production does the same). We need some other way to measure whether we are better or worse off, whether we need a pay rise… which is, in the end, what the state inflation number is supposed to tell us…
This is going to be one of the more interesting aspects of economics and politics in coming years. Deflation in itself doesn’t have to happen necessarily, but it does have to happen when an economy has become over inflated. But the cure adopted by countries to date is to try to inflate your way out of inflation. It’s like a hungover person trying to drink their hangover away - it might work for a few days but it’s just not a long term plan.