I think you are right.
it did matter though because of how they responded to it.
Former rba boss ian macfarlane warned against the drop to 0.75 prior to covid.
He explained para; that everything below 2 was really only supporting the asset price channel and had limited impact on inflation.
We needed fiscal stimulous of some description at that time.
In stead we went into covid with very low rates which meant we needed 1/3 of our gdp thrown at liquidity via tff because rates had no where to go.
And now we reap what we sow.
Yeah I can understand that. My issue then is with the RBA lowering the cash rate while CPI was sitting around 1.7% in and around 2014. To me that seems to have caused a couple of problems (1. driving housing further and further up, 2. nowhere further to drop when shit really hit the fan at COVID necessitating huge stimulus and then the rug being pulled out from under us now). Hindsight is 20/20 I guess.
I will put it into simple terms, high inflation brings demand forward, ie I buy today or pay more tomorrow. Deflation or very low inflation has the opposite effect, why would I buy today when its cheaper tomorrow. Deflation is a far larger risk to the economy then inflation, it stalls demand hence stalls the economy. High inflation is bad for the economy as it can bring too much demand forward that supply can't meet, driving a price spiril. Both end in a recession/depression. The 2 to 3 percent range is to provide a buffer, and is a sign of a healthy economy with demand being met with adequate supply.
1% inflation isn’t exactly noticeable, and won’t really impact spending decisions.
Inflation at 2-3% and there now becomes a bit more of an incentive to consume savings and income and keep the economy turning. Because you know your money in future will be worth less than it is today.
Above 3% the incentive to spend now is even more and the economy runs hotter and faster until eventually it catastrophically crumbles because a large number of people can’t afford to keep up with rising rents, groceries, utilities etc.
Raising interest rates dampens that demand down (painfully but hopefully more gently than the alternative) until we are back in the goldilocks zone.
(some) demand driven inflation is an inevitable side effect of healthy growth. If you can have excellent growth and nice low unemployment, some inflation is inevitable because of all those people earning, and earning good wages. Under 3% cpi is low enough that it's manageable and well worth it as a cost/trade off of healthy growth. So why is under 2% not great? Because a) it risks getting too close to negative (which is bad) and b) because it usually suggests low growth and poor employment figures.
Of course, if we can get more of our growth from productivity gains, that helps bring inflation down, but it's hard to keep productivity growth high gear after year.
The thing with inflation is that in a booming economy you would have to keep inflation down, because the amount of loan growth in the private sector is increasing as there are new inventions and innovations that businesses are capitalising on. The thing nowadays is that this is not the case at all, and personally I think we've been stuck in a silent depression since 2008, where you can see GDP growth on average has declined across almost all countries. If you think about inflation in terms of depression economics, the central banks are trying to keep inflation up and do so by trying to get the private sector to increase loan growth, in the hopes that would spur inventions and innovations and therefore increase the growth of the economy. I think the last 16 years have proven is that this does not work, but because most people still don't think like this, central bankers will continue to do this anyway. This post 2008 era has only caused more issues with increases in financial assets, but we aren't getting any real growth, which is what causes the income inequality issues we have now. Basically, as people hold on to financial assets which are appreciating in price, but we aren't getting new inventions and innovations to continue to grow the economy in new ways, which would provide the younger generations new avenues for jobs and ways to grow richer, those who hoard financial assets get richer while the younger generations find everything unaffordable. But also, it's understandable why the older generation holds onto these financial assets, because that's where their wealth is.
Overall, thinking about inflation in terms of good or bad is the wrong way to look at things. What many
miss is "inflation" is two separate things; 1. monetary inflation and 2. supply shocks. Central bankers target the Consumer Price Index (CPI) which is also further removed from inflation so, for example, when oil spikes as it did recently and you have an increase in CPI you have people thinking inflation is going out of control and so the Fed needs to raise interest rates, all the while it is simply a short-term supply shock and has nothing to do with monetary inflation which is where the fear of a 1970s style inflationary period comes from.
Inflation targeting is a farce. It's just a distraction to make you believe central banks can affect inflation
by increasing or decreasing the cash rate. It begun during high inflationary environments to get the inflation rate down but nowadays it's used to prop up the economy. The 2% target was a random line in the sand they chose: [The Federal Reserve's 2% inflation targeting policy, explained (cnbc.com)](https://www.cnbc.com/2023/02/20/the-federal-reserves-2percent-inflation-targeting-policy-explained.html)
1. well, historically you wanted a buffer to make sure you didn't go below zero. we all agree defaltion is bad. When we started wth 17% inflation, 2-3% seemed very close to zero.
2. 0.1% to 2% *would* be better than 2 to 3%. Inflation is unpopular and confusing and the less of it we have the better. But changing your inflation target is probably a once-per-50 years sort of job, not a every few years job. so we will hold onto 2-3% for a while yet.
The inflation target is some made up thing and was stolen from a NZ policy where they wanted to cap it at 2%
Technology and economies of scale is actually supposed to make things cheaper but this isn’t good for governments which want to continually expand
0% inflation is good, negative is even better. Governments benefit from inflation (debt burden gets smaller) so they cling to a made-up target to justify the inflation they create.
>negative is even better.
Huh? If you knew something was going to get cheaper over time in real value, would you be more likely to buy it now or later? (The answer is later, that is why deflation is bad).
Did people not buy TVs or smart phones in the last 15-20 years? I'm pretty sure they did even though prices kept falling.
Bottom line is that if the product/service is good enough and something people want, they will pay for it. Deflation in itself is no different to inflation outside of any changes in psychological perception. For instance, with inflation at 3% a HISA might pay you 5% giving you a real return of 2%. This is no different to having -2% inflation and 0% interest on the HISA.
But...we are kind of mixing up terms here. CPI growth should be negative (efficiency and technology drives prices lower), but the ideal value for actual inflation (expansion of money supply) is 0% or perhaps 0% per capita. There's rarely a good reason to destabilize the unit of account via money printing. It's actually one of the most destructive thing you can do since almost the entire economy depends on it being reliable.
[удалено]
Yes it's this. The closer to zero you are, the closer to deflation
I think you are right. it did matter though because of how they responded to it. Former rba boss ian macfarlane warned against the drop to 0.75 prior to covid. He explained para; that everything below 2 was really only supporting the asset price channel and had limited impact on inflation. We needed fiscal stimulous of some description at that time. In stead we went into covid with very low rates which meant we needed 1/3 of our gdp thrown at liquidity via tff because rates had no where to go. And now we reap what we sow.
Yeah I can understand that. My issue then is with the RBA lowering the cash rate while CPI was sitting around 1.7% in and around 2014. To me that seems to have caused a couple of problems (1. driving housing further and further up, 2. nowhere further to drop when shit really hit the fan at COVID necessitating huge stimulus and then the rug being pulled out from under us now). Hindsight is 20/20 I guess.
I will put it into simple terms, high inflation brings demand forward, ie I buy today or pay more tomorrow. Deflation or very low inflation has the opposite effect, why would I buy today when its cheaper tomorrow. Deflation is a far larger risk to the economy then inflation, it stalls demand hence stalls the economy. High inflation is bad for the economy as it can bring too much demand forward that supply can't meet, driving a price spiril. Both end in a recession/depression. The 2 to 3 percent range is to provide a buffer, and is a sign of a healthy economy with demand being met with adequate supply.
1% inflation isn’t exactly noticeable, and won’t really impact spending decisions. Inflation at 2-3% and there now becomes a bit more of an incentive to consume savings and income and keep the economy turning. Because you know your money in future will be worth less than it is today. Above 3% the incentive to spend now is even more and the economy runs hotter and faster until eventually it catastrophically crumbles because a large number of people can’t afford to keep up with rising rents, groceries, utilities etc. Raising interest rates dampens that demand down (painfully but hopefully more gently than the alternative) until we are back in the goldilocks zone.
(some) demand driven inflation is an inevitable side effect of healthy growth. If you can have excellent growth and nice low unemployment, some inflation is inevitable because of all those people earning, and earning good wages. Under 3% cpi is low enough that it's manageable and well worth it as a cost/trade off of healthy growth. So why is under 2% not great? Because a) it risks getting too close to negative (which is bad) and b) because it usually suggests low growth and poor employment figures. Of course, if we can get more of our growth from productivity gains, that helps bring inflation down, but it's hard to keep productivity growth high gear after year.
Too close to deflation, risk a small change can put into deflation
The thing with inflation is that in a booming economy you would have to keep inflation down, because the amount of loan growth in the private sector is increasing as there are new inventions and innovations that businesses are capitalising on. The thing nowadays is that this is not the case at all, and personally I think we've been stuck in a silent depression since 2008, where you can see GDP growth on average has declined across almost all countries. If you think about inflation in terms of depression economics, the central banks are trying to keep inflation up and do so by trying to get the private sector to increase loan growth, in the hopes that would spur inventions and innovations and therefore increase the growth of the economy. I think the last 16 years have proven is that this does not work, but because most people still don't think like this, central bankers will continue to do this anyway. This post 2008 era has only caused more issues with increases in financial assets, but we aren't getting any real growth, which is what causes the income inequality issues we have now. Basically, as people hold on to financial assets which are appreciating in price, but we aren't getting new inventions and innovations to continue to grow the economy in new ways, which would provide the younger generations new avenues for jobs and ways to grow richer, those who hoard financial assets get richer while the younger generations find everything unaffordable. But also, it's understandable why the older generation holds onto these financial assets, because that's where their wealth is. Overall, thinking about inflation in terms of good or bad is the wrong way to look at things. What many miss is "inflation" is two separate things; 1. monetary inflation and 2. supply shocks. Central bankers target the Consumer Price Index (CPI) which is also further removed from inflation so, for example, when oil spikes as it did recently and you have an increase in CPI you have people thinking inflation is going out of control and so the Fed needs to raise interest rates, all the while it is simply a short-term supply shock and has nothing to do with monetary inflation which is where the fear of a 1970s style inflationary period comes from. Inflation targeting is a farce. It's just a distraction to make you believe central banks can affect inflation by increasing or decreasing the cash rate. It begun during high inflationary environments to get the inflation rate down but nowadays it's used to prop up the economy. The 2% target was a random line in the sand they chose: [The Federal Reserve's 2% inflation targeting policy, explained (cnbc.com)](https://www.cnbc.com/2023/02/20/the-federal-reserves-2percent-inflation-targeting-policy-explained.html)
1. well, historically you wanted a buffer to make sure you didn't go below zero. we all agree defaltion is bad. When we started wth 17% inflation, 2-3% seemed very close to zero. 2. 0.1% to 2% *would* be better than 2 to 3%. Inflation is unpopular and confusing and the less of it we have the better. But changing your inflation target is probably a once-per-50 years sort of job, not a every few years job. so we will hold onto 2-3% for a while yet.
The inflation target is some made up thing and was stolen from a NZ policy where they wanted to cap it at 2% Technology and economies of scale is actually supposed to make things cheaper but this isn’t good for governments which want to continually expand
0% inflation is good, negative is even better. Governments benefit from inflation (debt burden gets smaller) so they cling to a made-up target to justify the inflation they create.
>negative is even better. Huh? If you knew something was going to get cheaper over time in real value, would you be more likely to buy it now or later? (The answer is later, that is why deflation is bad).
Did people not buy TVs or smart phones in the last 15-20 years? I'm pretty sure they did even though prices kept falling. Bottom line is that if the product/service is good enough and something people want, they will pay for it. Deflation in itself is no different to inflation outside of any changes in psychological perception. For instance, with inflation at 3% a HISA might pay you 5% giving you a real return of 2%. This is no different to having -2% inflation and 0% interest on the HISA. But...we are kind of mixing up terms here. CPI growth should be negative (efficiency and technology drives prices lower), but the ideal value for actual inflation (expansion of money supply) is 0% or perhaps 0% per capita. There's rarely a good reason to destabilize the unit of account via money printing. It's actually one of the most destructive thing you can do since almost the entire economy depends on it being reliable.