You understand this so much more than I do, but I wonder if at least *aiming* for 2% inflation is part of what has generally kept it around 3% in modern times. Basically they’re aiming for a pretty low rate, and they sometimes miss it, and the result is never too much worse than 3%.
So in this very unsophisticated hypothesis, if they aim for 2.5 to 3%, then maybe we end up with 3.5% or 4%?
I do understand the desire to not undershoot and that is valid. However we have rarely been at 2, and the argument being made is we can't stop until we hit 2 because that is the target and we need to hit the target (even though we rarely have hit that target in the past.)
If the argument is that the aim is off and aiming for 2 usually only gets you 3 but that is good enough then aren't we already there and can stop since inflation is below 3%? And if we keep going then aren't we really aiming for 1 to get 2?
They seem to be arguing that if they aim for 2 they can hit 2 and that 2 is some kind of optimal number. Neither of those seem to be sustainably supported by the historical data.
It seems the data tells a story of different time periods influenced heavily by different outside often global forces that are dictating different natural stable rates of inflation. Settling in to a stable rate seems to be more balancing of all aspects of the economy than holding to an arbitrary target number that has no scientific basis and may not be entirely achievable during different economic eras.
The era of the 1980s, the 1990s, and the 2010s drove different inflation outcomes. Inflation below 4% in the 80s wasn't sustainable even with very much higher interest rates than we have now. Inflation below 3% wasn't sustainable in the 1990s even with a low stable rate of inflation. Inflation above 2% wasn't achievable in the 2010s even with zero interest rates and quantitative easing. The task is difficult. Fixed rate inflation targeting seems to be a maladapted tool for the task of adapting policy to a dynamic economic environment.
Thanks for this summary! I will need to think about how I take this into consideration for retirement withdrawals.
You understand this so much more than I do, but I wonder if at least *aiming* for 2% inflation is part of what has generally kept it around 3% in modern times. Basically they’re aiming for a pretty low rate, and they sometimes miss it, and the result is never too much worse than 3%.
So in this very unsophisticated hypothesis, if they aim for 2.5 to 3%, then maybe we end up with 3.5% or 4%?
I do understand the desire to not undershoot and that is valid. However we have rarely been at 2, and the argument being made is we can't stop until we hit 2 because that is the target and we need to hit the target (even though we rarely have hit that target in the past.)
If the argument is that the aim is off and aiming for 2 usually only gets you 3 but that is good enough then aren't we already there and can stop since inflation is below 3%? And if we keep going then aren't we really aiming for 1 to get 2?
They seem to be arguing that if they aim for 2 they can hit 2 and that 2 is some kind of optimal number. Neither of those seem to be sustainably supported by the historical data.
It seems the data tells a story of different time periods influenced heavily by different outside often global forces that are dictating different natural stable rates of inflation. Settling in to a stable rate seems to be more balancing of all aspects of the economy than holding to an arbitrary target number that has no scientific basis and may not be entirely achievable during different economic eras.
The era of the 1980s, the 1990s, and the 2010s drove different inflation outcomes. Inflation below 4% in the 80s wasn't sustainable even with very much higher interest rates than we have now. Inflation below 3% wasn't sustainable in the 1990s even with a low stable rate of inflation. Inflation above 2% wasn't achievable in the 2010s even with zero interest rates and quantitative easing. The task is difficult. Fixed rate inflation targeting seems to be a maladapted tool for the task of adapting policy to a dynamic economic environment.