Latest Inflation Numbers and Discussion

[Montecfo]

I think that’s what’s called moving the goalposts.

Well, except the 2% goal was invented out of thin air, and relatively recently.

 

[Chuckanut]

Well, except the 2% goal was invented out of thin air, and relatively recently.

I would disagree. In our recent history We had inflation for several years in the area of 1-2%. Granted that’s pretty low. Mostly it’s been in the 3-4% area, and for many years of my life well over 5%. We shall see what happens over the next 18 months or so. If we end up with under 3% inflation, I will be happy to be wrong.

 

[GenXguy]

The 2% target was working fine until they "ignored it" and "let inflation run hot" and then said "inflation is transitory". That's a big reason we got into this mess with such high inflation the last few years because they didn't adhere to the target when they should have. 1% would be better, but they consider that too close to the edge and don't want to risk deflation, so they settle on 2%. Inflation hurts the lower class, not so much those with stock portfolios whose investments go up when the Fed lowers interest rates, so they write about increasing the target rate. That's not good for the little guy.

 

[Gumby]

Still not a viable argument as to why 2% is "correct".

 

[Montecfo]

I would disagree. In our recent history We had inflation for several years in the area of 1-2%. Granted that’s pretty low. Mostly it’s been in the 3-4% area, and for many years of my life well over 5%. We shall see what happens over the next 18 months or so. If we end up with under 3% inflation, I will be happy to be wrong.

Disagree or not, the 2% target was invented out of thin air. But it did work well, when the economy was recovering from the financial crisis. That is when the target was born. From memory, it was 2012.

 

[JoeWras]

Disagree or not, the 2% target was invented out of thin air. But it did work well, when the economy was recovering from the financial crisis. That is when the target was born. From memory, it was 2012.

That's my memory too. At the time, it seemed a struggle to even create inflation up to 2%. So that goalpost seemed pretty normal.

As the world re-sorts itself with new cheap manufacturing, we'll see what happens. Vietnam seems to be a new nexus of cheap goods for example.

Conversely, the labor issue in the Western world economies calls out for continued service inflation. With Boomers and Gen-Xers getting out of the workforce in increasing numbers, we're in for more interesting times ahead.

 

[Montecfo]

You are right and I have pointed out same. The 2% seemed to be the minimum acceptable inflation when we were running around 1%.

If that target were being set or reset today my guess is it would be a range between 2 and 2.5%.

Or no target. We somehow managed for decades without a specific target.

 

[target2019]

Bing Chat thinks it knows. Quote from here to message end.

The 2% target inflation rate has an interesting origin. It was established by the Federal Reserve in 2012, but the internal debate began much earlier, in the mid-1990s¹. The target was not made public and explicit until 2012, following a decades-long deliberation within the Federal Reserve System¹.

The concept of a 2% inflation target actually originated from New Zealand in the late 1980s. During a period of high inflation, New Zealand's finance minister, Roger Douglas, made an offhand comment during a television interview, stating he would ideally want an inflation rate of between zero to 1 percent². This comment led the Reserve Bank of New Zealand to work out a specific target, considering an "upward bias" in inflation calculations. They estimated this bias to be around 0.75 percent, which they rounded to 1 percent, thus setting a target boundary of 2 percent². This target was quickly adopted by other central banks around the world, including Canada and England².

The Federal Reserve's adoption of this target was influenced by the need for price stability and the desire to manage inflation expectations effectively. The target helps the Fed in its dual mandate to achieve maximum employment and price stability¹.

Source: Conversation with Bing, 5/17/2024
(1) The Origins of the 2 Percent Inflation Target | Richmond Fed. The Origins of the 2 Percent Inflation Target.
(2) The History and Future of the Federal Reserve’s 2 Percent Target Rate .... The History and Future of the Federal Reserve’s 2 Percent Target Rate of Inflation.
(3) Why the Fed Targets a 2 Percent Inflation Rate | St. Louis Fed. The Fed’s Inflation Target: Why 2 Percent?.

 

[Qs Laptop]

Disagree or not, the 2% target was invented out of thin air.

Invented out of thin air? I'm sure most of economists at the Federal Reserve would disagree!

 

[Chuckanut]

As the world re-sorts itself with new cheap manufacturing, we'll see what happens. Vietnam seems to be a new nexus of cheap goods for example.

Perhaps. We seem to have two persons running for President who enjoy keeping existing tariffs, and putting new tariffs on foreign made goods. Time will tell what happens.

 

[GenXguy]

Perhaps. We seem to have two persons running for President who enjoy keeping existing tariffs, and putting new tariffs on foreign made goods. Time will tell what happens.

Exactly, and those tariffs really just amount to an inflation tax on American consumers on top of continuing inflation and all the existing price increases we've already had, at a time when more people are already having difficulty paying the bills.

 

[Montecfo]

Invented out of thin air? I'm sure most of economists at the Federal Reserve would disagree!

Well I do not think they had much to do with it. They appear to have simply followed New Zealand.

 

[audreyh1]

I remember there were wink wink nudge nudge type questions about an inflation target to the Fed from the press all the way back with Greenspan in the 90s. Sounds like it had been discussed for decades before 2012.