Mmm. IIRC (from an econ degree a long time ago) there’s another reason to prefer 2%. From time to time, the relative wage for different activities needs to change, reflecting technological or taste changes. Now, it may be silly money illusion, but workers are significantly more opposed to reduced nominal wages than a below-inflation increase, so we need a a bit of inflation in the system or we get more wage rigidity which increases adjustment costs. Of course 2% real growth would work too - better - but we don’t always have that. It’s always struck me as reasonably plausible?
I thought (IANAE) that the argument for a low rate of inflation is that it 'oils the wheels', making people feel richer if they get a pay rise, even if they're not in reality.
Sorta. Given technological change some wages should be falling at any one time. But people really, really, hate falling nominal wages and will put up with - better at least - falling real wages and static nominal. So, 2% inflation greases the wheels in that sense, yes.
The CB is never out of ammo and there is never any need for fiscal policy to control inflation . No evidence it has any controlling effect. OMOs are better than QT as it prevents the markets from getting excited . It's possible to control Monetary Demand without manipulation of the policy rate ,which distorts asset markets and can cause friction in the economy . All we need the CB to do is target 4-6% broad money growth and we will get low inflation (2% plus or minus ~1% )in due course . Targeting 0 is dangerous as it risk deflation and money itself being an appreciating asset .2% is achievable if they try and don't follow Keynesian doctrine
I haven't come to a firm conclusion in my own mind on this, but I would suggest that in the absence of stupid/bad government, prices of pretty much everything decrease in capitalist free markets in the long term. There's also an awful lot of things that only go up because they are linked contractually to inflation measures, and I've not disentangled those - do they go up largely (partly?) because they go up? My tentative view is that an economy should aim for prices to go down by 2% a year - inflation simply lets the public sector off the hook.
With the rare exceptions of royalties and exploitation leases, one hundred per cent of the cost of any commodity or service is the labor that went into it. Prices of tech should come down naturally, increasing real wages. Manufacturers find simpler and cheaper ways to do stuff. Services are a different animal. It's a delicate balance, and nobody has got it right.
Mmm. IIRC (from an econ degree a long time ago) there’s another reason to prefer 2%. From time to time, the relative wage for different activities needs to change, reflecting technological or taste changes. Now, it may be silly money illusion, but workers are significantly more opposed to reduced nominal wages than a below-inflation increase, so we need a a bit of inflation in the system or we get more wage rigidity which increases adjustment costs. Of course 2% real growth would work too - better - but we don’t always have that. It’s always struck me as reasonably plausible?
Yes, that's another reason. As in another response here in the comments.
Inflation is a tax. Governments don’t like zero % taxes.
🎯
I thought (IANAE) that the argument for a low rate of inflation is that it 'oils the wheels', making people feel richer if they get a pay rise, even if they're not in reality.
Sorta. Given technological change some wages should be falling at any one time. But people really, really, hate falling nominal wages and will put up with - better at least - falling real wages and static nominal. So, 2% inflation greases the wheels in that sense, yes.
Good points,
The CB is never out of ammo and there is never any need for fiscal policy to control inflation . No evidence it has any controlling effect. OMOs are better than QT as it prevents the markets from getting excited . It's possible to control Monetary Demand without manipulation of the policy rate ,which distorts asset markets and can cause friction in the economy . All we need the CB to do is target 4-6% broad money growth and we will get low inflation (2% plus or minus ~1% )in due course . Targeting 0 is dangerous as it risk deflation and money itself being an appreciating asset .2% is achievable if they try and don't follow Keynesian doctrine
I haven't come to a firm conclusion in my own mind on this, but I would suggest that in the absence of stupid/bad government, prices of pretty much everything decrease in capitalist free markets in the long term. There's also an awful lot of things that only go up because they are linked contractually to inflation measures, and I've not disentangled those - do they go up largely (partly?) because they go up? My tentative view is that an economy should aim for prices to go down by 2% a year - inflation simply lets the public sector off the hook.
With the rare exceptions of royalties and exploitation leases, one hundred per cent of the cost of any commodity or service is the labor that went into it. Prices of tech should come down naturally, increasing real wages. Manufacturers find simpler and cheaper ways to do stuff. Services are a different animal. It's a delicate balance, and nobody has got it right.