Current Inflation Index Reports and Fed Policy/Actions

[Qs Laptop]

Does anyone know why?

Does anyone know why the Fed desires a 2% inflation rate?

* To prevent deflation.
* Creates upward pressure on wages to keep pace with inflation, providing workers with pay raises.
* Creates consistency in the economy. Businesses and individuals can expect and plan for 2% inflation.
* Along these same lines consistent inflation of 2% prevents psychological panic that prices could spike in the future.
* Creates some wiggle room to adjust rates as the economy goes through periodic spasms.

 

[Montecfo]

IThatwas a really bad jobs report.
57k jobs, 74k of downward revisions. That is a net decline and people fleeing the labor force in droves.

I do not see room for hikes.

 

[Markola]

I checked the math and, at 2% inflation the purchasing power of every dollar one owns falls in half every 35 years.

However, the 2% target is only about 14 years old, when Ben Bernanke adopted it, and they’ve failed consistently at achieving it. All the retirement calculators have you plan for 3% inflation. In that case, the half life of each dollar’s purchasing power is 23 years.

The Minneapolis Fed indicates we’ve been at 4.2% on average for the last 5 years through May. At this rate, the dollar’s value halves in 17 years (!). I’ve been semi-retired for 6 years and I am feeling inflation everywhere.

I just think these questions are interesting, and actually concerning. Explicitly stating that it’s intentional Fed policy for the value of my dollars to fall in half even every 35 years seems remarkable. I guess that’s why we’re the best looking horse in the glue factory.

Maybe it’s more about letting inflation run ABOVE the 3% estimated interest rate the government pays on the mushrooming national debt, and hoping we won’t notice the invisible tax on our purchasing power?

 

[audreyh1]

I checked the math and, at 2% inflation the purchasing power of every dollar one owns falls in half every 35 years.

However, the 2% target is only about 14 years old, when Ben Bernanke adopted it, and they’ve failed consistently at achieving it. All the retirement calculators have you plan for 3% inflation. In that case, the half life of each dollar’s purchasing power is 23 years.

The Minneapolis Fed indicates we’ve been at 4.2% on average for the last 5 years through May. At this rate, the dollar’s value halves in 17 years (!). I’ve been semi-retired for 6 years and I am feeling inflation everywhere.

I just think these questions are interesting, and actually concerning. Explicitly stating that it’s intentional Fed policy for the value of my dollars to fall in half even every 35 years seems remarkable. I guess that’s why we’re the best looking horse in the glue factory.

Maybe it’s more about letting inflation run ABOVE the 3% estimated interest rate the government pays on the mushrooming national debt, and hoping we won’t notice the invisible tax on our purchasing power?

14 years ago may be when the Fed officially adopted the 2% target, but it had been rumored for years as I well remember during Greenspan’s time, probably as that was already known to be an economic “sweet spot” by economists.

There were times during 2010-2020 that we fell below that 2%. Inflation really heated up post pandemic in second half 2021.

 

[dickoncapecod]

Technology is deflationary. Productivity gains are deflationary. Competition is deflationary. These are good things. We should be enjoying falling prices. Yet, we are experiencing inflation.

Why do they fear deflation more?

Hi. Fed "fears" deflation because central banks have no tools to combat it. Runaway deflation is associated with extreme economic contractions --- creating reserves doesn't help because the lending function that creates money has stopped. Adding reserves just adds more EXCESS reserves.
Regards, Dick

 

[GenXguy]

Yes, economies suffer when inflation is below 2%. That appears to be a sweet spot. I’m sure there have been economic papers, studies, etc. Lots of info on the internet.

They aren't very effective at getting it down to 2% even using the government figures, and most people report their personal inflation is a lot higher. I would be fine with 0.1% to 1% inflation for about 10 years to make up for the high inflation we have had in recent years. Just enough that it's inflation but not deflation. lol

I would like to see an interest rate increase - it's overdue with this inflation.

 

[Markola]

So the free market, if there was one, would be naturally deflationary, given the application of technology, constant productivity gains, and competition to lower prices. We don’t live in that world, however. Maybe that’s a good thing, but ever-lower prices is certainly not what we have. When I was a child, my mother would take us grocery shopping for $20-$30 or so. And food production efficiency has exploded since then, so why have prices risen?

Our world is one in which the government and central bank collude forthrightly to “achieve” 2% inflation. They aren’t good at it, so we’ve usually had 3% or 4% historically. Or maybe they are dishonest, because they actually need to print money to pay the debt, stealing our purchasing power silently. Regardless, it means, in our Federal Reserve Banking System (Oligopoly) -managed world, we pay higher and higher prices, when in a free market state we would pay lower and lower prices. We’d also earn lower and lower wages, including bankers, which I suspect is getting closer to the truth about the bizarre, upside down system, when you stop and think about it. I smell a rat.

 

[SnowballCamper]

I checked the math and, at 2% inflation the purchasing power of every dollar one owns falls in half every 35 years.

However, the 2% target is only about 14 years old, when Ben Bernanke adopted it, and they’ve failed consistently at achieving it. All the retirement calculators have you plan for 3% inflation. In that case, the half life of each dollar’s purchasing power is 23 years.

The Minneapolis Fed indicates we’ve been at 4.2% on average for the last 5 years through May. At this rate, the dollar’s value halves in 17 years (!). I’ve been semi-retired for 6 years and I am feeling inflation everywhere.

I just think these questions are interesting, and actually concerning. Explicitly stating that it’s intentional Fed policy for the value of my dollars to fall in half even every 35 years seems remarkable. I guess that’s why we’re the best looking horse in the glue factory.

Maybe it’s more about letting inflation run ABOVE the 3% estimated interest rate the government pays on the mushrooming national debt, and hoping we won’t notice the invisible tax on our purchasing power?

In case you were asking about why have an inflation target rather than a deflation target... Deflation is bad because then there is no incentive to buy anything today. I can just wait and it will be cheaper in the future. This reduces demand, and then also production, and therefore fewer workers are needed, fewer jobs, less demand because fewer people are working, etc. The downward spiral of the depression, where there was deflation, lasted until WW2 increased demand. As a policy goal, deflation should be avoided at all cost. Stable prices are great for us as individuals, but as a policy goal that won't be achieved precisely (with zero inflation), it's better to have a little inflation. If I'm on the fence about buying something, the fact that it will be more expensive in the future is motivation to buy it sooner rather than later. Low inflation is good to incentivize demand in this way. High inflation is bad for (I think) obvious reasons.
As for the the nebulous thing called the government "thinking or hoping" we won't notice the invisible tax on our purchasing power, we here in ER land are not the noisy clients of policymakers...quite the opposite. To the extent that the government "thinks" about policy, it is just to get elected, and government spending works for that very well. The side effect is the inflation tax.

 

[audreyh1]

So the free market, if there was one, would be naturally deflationary, given the application of technology, constant productivity gains, and competition to lower prices. We don’t live in that world, however. Maybe that’s a good thing, but ever-lower prices is certainly not what we have. When I was a child, my mother would take us grocery shopping for $20-$30 or so. And food production efficiency has exploded since then, so why have prices risen?

Our world is one in which the government and central bank collude forthrightly to “achieve” 2% inflation. They aren’t good at it, so we’ve usually had 3% or 4% historically. Or maybe they are dishonest, because they actually need to print money to pay the debt, stealing our purchasing power silently. Regardless, it means, in our Federal Reserve Banking System (Oligopoly) -managed world, we pay higher and higher prices, when in a free market state we would pay lower and lower prices. We’d also earn lower and lower wages, including bankers, which I suspect is getting closer to the truth about the bizarre, upside down system, when you stop and think about it. I smell a rat.

Probably not. Companies have gotten smarter. I don’t think your premise is realistic. Also the Fed was created to help temper booms and busts which were very prevalent late 1800s early 1900s.

 

[Markola]

^^^ That seems about right to me, SnowballCamper. Furthermore, “…If I'm on the fence about buying something, the fact that it will be more expensive in the future is motivation to buy it sooner rather than later,” introduces the demand for easy credit in our society, with predictable effects, and profits to the banking class.

 

[SnowballCamper]

^^^ That seems about right to me, SnowballCamper. Furthermore, “…If I'm on the fence about buying something, the fact that it will be more expensive in the future is motivation to buy it sooner rather than later,” introduces the demand for easy credit in our society, with predictable effects, and profits to the banking class.

Naturally...Banking is where it's at. I do my best to not give them any of my money. It took a few hard lessons, but I'm good for now.

 

[Gumby]

^^^ That seems about right to me, SnowballCamper. Furthermore, “…If I'm on the fence about buying something, the fact that it will be more expensive in the future is motivation to buy it sooner rather than later,” introduces the demand for easy credit in our society, with predictable effects, and profits to the banking class.

I sincerely doubt that the people running up credit card debts are thinking about inflation. They're thinking that they want something and have no ability to delay gratification until they can afford it. It's easy to defeat those evil bankers - just don't carry a balance or pay interest. I have not done either since I got my first card 42 years ago, even though virtually every penny I spend goes through a credit card.

 

[Markola]

I don’t own any gold, but it was the New York gold owners who did well in the deflation of the late 1800s. Gold was scarce and desirable and held its value. We were on a gold standard, too, so dollar holders did well, too, because they couldn’t just be printed to oblivion. If you had dollars, you could buy more and more for them as prices fell. If you earned dollars, you earned fewer of them, as wages fell. If you OWED dollars, like most farmers did, you were really in a pickle, because deflation meant you got less and less for your corn or whatever, but your debt payments stayed the same. But if you owned loans, which needed to be repaid in constant dollars, you were better off, because your other costs to live were falling while you received steady payments. Until everyone who owed you defaulted, that is.

Gold also usually does well in inflationary times, like since the well-intentioned Pandemic helicopter money printing.

I don’t have answers, but it is interesting to ponder our non-free market economy, in which prices should naturally be falling, but don’t, thanks to the Treasury and the Federal Reserve system’s intentional inflation.

 

[Markola]

I sincerely doubt that the people running up credit card debts are thinking about inflation. They're thinking that they want something and have no ability to delay gratification until they can afford it. It's easy to defeat those evil bankers - just don't carry a balance or pay interest. I have not done either since I got my first card 42 years ago, even though virtually every penny I spend goes through a credit card.

Yep, I’m the same. By this logic, though, people would not delay purchases because they believe prices will soon fall due to deflation, either.

 

[dickoncapecod]

So the free market, if there was one, would be naturally deflationary, given the application of technology, constant productivity gains, and competition to lower prices. We don’t live in that world, however. Maybe that’s a good thing, but ever-lower prices is certainly not what we have. When I was a child, my mother would take us grocery shopping for $20-$30 or so. And food production efficiency has exploded since then, so why have prices risen?

Our world is one in which the government and central bank collude forthrightly to “achieve” 2% inflation. They aren’t good at it, so we’ve usually had 3% or 4% historically. Or maybe they are dishonest, because they actually need to print money to pay the debt, stealing our purchasing power silently. Regardless, it means, in our Federal Reserve Banking System (Oligopoly) -managed world, we pay higher and higher prices, when in a free market state we would pay lower and lower prices. We’d also earn lower and lower wages, including bankers, which I suspect is getting closer to the truth about the bizarre, upside down system, when you stop and think about it. I smell a rat.

Yes....well in this imperfect world, you DID/DO earn a great deal more than Dad did when groceries cost $20-30. Further, there is no double-secret conspiracy to print (secret) money to screw you/us. If you pick up a money and banking text and learn to read just a few regular Fed reports/disclosures, the boogie-man disappears. Then you'll be able to DISAGREE with policy if you wish.
Regards, Dick

 

[Montecfo]

Inflation in the US.has been remarkably stable to lower over long periods. Consider the following annual CPI figures:

Since 2010: 2.76%
Since 2000: 2.57%
Since 1990: 2.65%
Since 1980: 3.10%
Since 1970: 3.93%
Since 1960: 3.82%

Source: Gemini citing BLS figures.

 

[Markola]

I don’t need to justify my study to anyone. Regards, Markola

 

[Aerides]

I sincerely doubt that the people running up credit card debts are thinking about inflation. They're thinking that they want something and have no ability to delay gratification until they can afford it. It's easy to defeat those evil bankers - just don't carry a balance or pay interest. I have not done either since I got my first card 42 years ago, even though virtually every penny I spend goes through a credit card.

But I also know from personal experience, many of those purchases are needs, not wants, and they simply have no other means. When you have a low income and no savings, life's little curveballs throw havoc at a tiny paycheck.

Not everyone who uses debt and buys things they can't afford is a victim of their own inability to wait until they can afford it. Sometimes it's just...filling my tank was $75 instead of the $40 I was budgeting for. A flat tire. A few shifts got cancelled because it's slow.

But yes, when you're at the bottom side of the wealth/income chart, inflation isn't something you think about because you can't control it, you're just trying to get to your next paycheck and hope you can pay rent and buy food.

 

[ShokWaveRider]

Does anyone know why the Fed desires a 2% inflation rate?

Because it is sensible and sustainable.

 

[Gumby]

...

Not everyone who uses debt and buys things they can't afford is a victim of their own inability to wait until they can afford it. Sometimes it's just...filling my tank was $75 instead of the $40 I was budgeting for. A flat tire. A few shifts got cancelled because it's slow.
...

A fair point.

 

[Gumby]

Yep, I’m the same. By this logic, though, people would not delay purchases because they believe prices will soon fall due to deflation, either.

But businesses, who have CFOs specifically to maximize their profits and cash flow, most certainly will take it into account.

 

[copyright1997reloaded]

Yes, economies suffer when inflation is below 2%. That appears to be a sweet spot. I’m sure there have been economic papers, studies, etc. Lots of info on the internet.

Respectfully, this is a Keynesian economics talking point. One of the best decades in all of US history had declining prices, i.e. "deflation". In the 1870's real GNP growth averaged 4.9-5.1% (depending on how one measured the decade) due to adding tons of additional farm land, new iron and steel (e.g. Carnegie) and the use of oil products, (Rockefeller, the original "trillionaire" (in terms of todays $)).

We have been conditioned to think that inflation is a necessary evil. In reality, it has eroded the buying power of the dollar to require 35X the number of dollars as one had in 1913, or 8.5x 1970 to today.

But we all get excited when nominal interest rates go up (as savers) and come on here and gloat about the great 4.2% CD rate we get.

If we have increasing productivity it should result in lowering of prices.

The fact that it doesn't is because there are many forces that like fiat currencies having less buying power over time.

 

[GenXguy]

Inflation in the US.has been remarkably stable to lower over long periods. Consider the following annual CPI figures:

Since 2010: 2.76%
Since 2000: 2.57%
Since 1990: 2.65%
Since 1980: 3.10%
Since 1970: 3.93%
Since 1960: 3.82%

Those look high, even more so when you consider they are CPI gub'ment figures. All those figures are well over the Fed target of 2% (PCE).

 

[Koolau]

Technology is deflationary. Productivity gains are deflationary. Competition is deflationary. These are good things. We should be enjoying falling prices. Yet, we are experiencing inflation.

Why do they fear deflation more?

The Great Depression was deflationary. That's why. That's something none of us here have ever experienced. When you realize that something you looked at yesterday and considered buying is dropping in price, what would be your reaction? Wait until tomorrow to buy it. BUT then you see that it went down in price the next day. What is your reaction... and on (and on) it went.

The FED has a relatively effective (though crude and slow) way to fight inflation. They make things more expensive (by increasing the cost of borrowing). That often triggers a recession. But if prices are dropping, how do you induce people to buy what they know will be cheaper tomorrow? Eventually they have to "give" money away to get people to buy (0 interest rate). They can only flood the market with money (liquidity) and HOPE that people will buy. It's not only crude, it's not very effective. People can be stubborn (and they are easily frightened by something they've not experienced). Frightened people don't spend their money.

 

[Markola]

^^^ Good answer. The economy would seize up.

But then, people would need stuff. They would start to spend. Producers would start to produce again, and they would compete. Prices could be formed based on market demand and market supply.

It’s not nirvana, because excesses build up and we get harsh, fast panics, booms and busts, as happened in the late 1800s. But those shocks would wipe out debts, so we’d be less prone to government and private debt reliance. And we wouldn’t have a system in which everyone’s purchasing power is reduced 2-4% or more in order to paper over every shock, allowing market cleansing of excesses to happen.

Our society since the GFC has traded fast, cleansing recessions for constant, grinding monetary inflation. The tradeoff is higher debt to fund the helicopter money printing and the social programs needed to bolster a populace accustomed to big government intervention. But the stimulus tool is running its course rapidly. Debt and debt payments are mushrooming beyond Defense spending. Inflation is nowhere near 2%. We’re entering the printing spiral phase into which every other currency has been sucked.