Latest Inflation Numbers and Discussion

Chuckanut said:

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

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

Montecfo said:

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

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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.

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.

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

Chuckanut said:

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.

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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.

Montecfo said:

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.

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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.

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.

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?.

Montecfo said:

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

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

JoeWras said:

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.

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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.

Chuckanut said:

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.

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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.

Qs Laptop said:

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

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

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.

GenXguy said:

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.

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Yes, blanket tariffs on consumer goods and components will act like inflation. However, the latest round of tariffs were on Chinese EVs, Chinese semiconductors, and Chinese steel. These are targeted tariffs.

Meanwhile, the US has new legislation supporting US EVs and US semiconductors with government subsidies.

How much will US consumers actually be affected by the tariffs on Chinese EVs, since no one is buying them anyway?

How many semiconductors does the US buy from China?

FREE866 said:

Does anyone here really change their spending habits based on inflation?


I know I don't and I'm probably much less well off than most of the posters on here

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Anyone yes. Folks on the lower spectrum of "middle class" and below. Perhaps you are unaware of this but they represent a large portion of the total population.

FREE866 said:

Does anyone here really change their spending habits based on inflation?

I know I don't and I'm probably much less well off than most of the posters on here

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Yes, probably about everyone, even if they don't realize it. If the price of everything is going up faster due to inflation, that leaves less money for discretionary. So you have to make choices where you'll cut. Inflation made major changes in my retirement plans such as relocating, which I'm not going to do now. But I'm also much more restrictive on dining out and other spending than I ever would have expected to be prior to the big inflation run-up.

FREE866 said:

Does anyone here really change their spending habits based on inflation?


I know I don't and I'm probably much less well off than most of the posters on here

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I haven't either, but it is basic economic theory that it should be so. With rare exceptions, the demand curve slopes downward while the supply curve slopes upward. So the higher the price, the lower the demand. Eventually, in the face of lower demand, the price drops so that supply and demand are again balanced.

However, inflation also causes wage income to go up and can have the effect of shifting the entire demand curve upward. It is people who no longer have wage income who are most likely to change their behavior. (like people on this board)

I changed. I dropped my wine club membership after they raised the price by $20 a month. I now drink tap water at most meals, instead of wine with lunch and dinner. Amazon Prime haws been gone for months and I don’t miss it. Being a cheapskate is liberating.

Gumby said:

I haven't either, but it is basic economic theory that it should be so. With rare exceptions, the demand curve slopes downward while the supply curve slopes upward. So the higher the price, the lower the demand. Eventually, in the face of lower demand, the price drops so that supply and demand are again balanced.

However, inflation also causes wage income to go up and can have the effect of shifting the entire demand curve upward. It is people who no longer have wage income who are most likely to change their behavior. (like people on this board)

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You literally are giving me flashbacks to my college ECON101 class. A good portion of that class was curves, and then shifting the curves.

the data shows that spending by consumers is still very robust, in spite of inflation.

Gumby said:

I haven't either, but it is basic economic theory that it should be so. With rare exceptions, the demand curve slopes downward while the supply curve slopes upward. So the higher the price, the lower the demand. Eventually, in the face of lower demand, the price drops so that supply and demand are again balanced.

However, inflation also causes wage income to go up and can have the effect of shifting the entire demand curve upward. It is people who no longer have wage income who are most likely to change their behavior. (like people on this board)

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Economic theorys are just that--theories. Thats is exactly why economists are for the most part horrible at making predictions. 2023 was the latest example, majority predicted a recession, some a deep one. Never happened.

Gumby said:

Why? I've read several economists arguing that 2% is too low and that the Fed's goal should be 2.5% or even 3%. What's the case for 2% being the right number.

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+1 Not sure why they don't define the inflation target as a range... IMO 2.5%-3.5% would be fine. But that wouldn't mean that just because we're near the top of my 2.5%-3.5% range that one would reduce interest rates.... more just hold and see how inflation floats with the range with steady interest rates.

A lot of people are flipping out over 7% mortgage rates but IMO a 7% mortgage rate is only a little high. People have been spoiled by the 3-4% mortgage rates of the last decade that were unusually low.

Chuckanut said:

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

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True, but perhaps the goal posts weren't in the right place to begin with so it is just fixing it.

pb4uski said:

A lot of people are flipping out over 7% mortgage rates but IMO a 7% mortgage rate is only a little high. People have been spoiled by the 3-4% mortgage rates of the last decade that were unusually low.

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Yep. This has helped stall the market. With cheap money, a lot of people "our age" bought second homes and are using them for investment, taking them out of the market for the next generations. Nobody wants to give up those cheap mortgages.

So now a more historical rate is seen as wrong.

The Fed introduced the 2% inflation target during a period when inflation was lower than 2% and worryingly close to zero. The Fed (and everyone else) was worried about persistent deflation. It first came out as a floor, not a ceiling, and when very low inflation persisted, it was also discussed as a possible multi year average, meaning the Fed might allow for multiple years above 2%.

The Fed is more concerned with price stability over time, not hitting the 2% on the nose. If average inflation and inflation expectations remain anchored around 2.5% +/- 0.5% the Fed is likely to remind us it is concerned, but not likely to take any action. It is more likely to take action if inflation looks to trend below 2% or above 3%, or if the economy starts to head toward recession.