10 Updates

Two Percent Inflation: A Good Thing or A Bad Thing

Apr 8 2014, 4:08pm CDT | by

Maybe it’s just me, but it seems like every time Janet Yellen speaks publicly she goes out of her way to call attention to the FOMC’s two percent inflation target and remind us that she takes that...

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15 weeks ago

Two Percent Inflation: A Good Thing or A Bad Thing

Apr 8 2014, 4:08pm CDT | by

Maybe it’s just me, but it seems like every time Janet Yellen speaks publicly she goes out of her way to call attention to the FOMC’s two percent inflation target and remind us that she takes that target very seriously. She sincerely wants higher inflation for the good of the economy and she may be right to do so, but it makes me cringe.

When Ben Bernanke joined the Board of Governors the first time, he had a goal to implement an inflation target. Fortunately, from my point of view, Alan Greenspan never let that idea come to a vote. While I could sort of understand the academic case for positive inflation, in my gut I didn’t want to vote for inflation. Among other reasons, I didn’t want to have to explain such a vote to the folks back home. Fortunately, I was gone by the time it finally came to a vote during Mr. Bernanke’s later stint as Chairman.

I was reminded of that today as I looked over some promotional material on my broker’s web site, particularly a chart on how inflation destroys purchasing power. A graph showed what happens to the value of $50,000 after 25 years at a four percent inflation rate, a three percent inflation rate, and a two percent inflation rate. Hey, that two percent inflation rate was what the FOMC settled on as desirable. A two percent inflation rate—the Fed’s target—reduces the purchasing power of $50,000 to $30,477 in 25 years. That doesn’t look so benign to me.

One argument for a positive inflation rate is easy to understand, but I’m not sure it requires a rate as high as two percent. That is the argument that inflation might get so low that we accidentally slip into deflation. The Japanese experience has taught us that we don’t want to go there. But, wouldn’t one percent be a sufficient buffer?

Another argument that makes sense to central banker types is the “zero bound” argument. If you have three percent inflation, the central bank can push the policy rate down to one percent, which translates to a negative two percent in real terms. A zero nominal rate would be a powerful negative three percent with three percent inflation. But if inflation is zero, the real rate can be no lower than the nominal rate, hence the “zero bound.” We hear chatter that the ECB may be contemplating a negative nominal rate to deal with this problem.

Back in school I do vaguely recall discussions of inflation that went slightly beyond the superficial. I remember the point being made that the evils of inflation are really evils of unanticipated inflation—a surprise level of inflation. If the inflation rate is steady and anticipated, then other prices and incomes would adjust to it and remove most of the damage. The purchasing power of a dollar, or $50,000, would still be eroded by inflation but wages, incomes, and interest rates would also be higher as an offset.

Money illusion is involved if we prefer six percent wage increases during a period of three percent inflation to three percent wage increases with zero inflation, but money illusion may have its uses. For example, a high unemployment rate would be easier to remedy if wages could fall. It is easier for wages to fall in real terms if they don’t have to fall in nominal terms. Adjusting to changing competitive conditions internationally is likely to be easier if there is sufficient inflation to have flexible real wages despite inflexible nominal wages.

I’m sure that Ms. Yellen and Mr. Bernanke can explain the benefits of 2 percent inflation better than I can. I’m only glad I don’t have to. Besides, why couldn’t they have chosen one percent as a target?

 
Update
10

7 weeks ago

RM47mil KWSG contributions still unclaimed

Jun 9 2014 7:54am CDT | Source: Business Times Malaysia

KUALA LUMPUR: About RM47 million of contributions in the Teachers Provident Fund (KWSG) still remain unclaimed, the Dewan Rakya ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
9

7 weeks ago

Gold shop lost almost RM1mil

Jun 9 2014 3:50am CDT | Source: Business Times Malaysia

KANGAR: A gold shop owner lost almost RM1 million after after the safe on in his shop was broken into by r ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
8

7 weeks ago

Motion to debate MAS losses in Dewan Rakyat rejected

Jun 9 2014 3:39am CDT | Source: Business Times Malaysia

KUALA LUMPUR: AN emergency motion to debate the losses incurred by Malaysia Airlines last year, amounting to RM1.2 billion was reje ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
7

7 weeks ago

MH370 Tragedy: Hisham: RM27.6 mil spent on 1st phase of SAR

Jun 9 2014 2:11am CDT | Source: Business Times Malaysia

KUALA LUMPUR: Malaysia spent some RM27.6 million in its first phase of the search operations for missing Malaysia Airline flight MH370, said Acting Transport Minister, Da ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
6

7 weeks ago

9.1m litres of diesel seized in a month

Jun 8 2014 1:11am CDT | Source: Business Times Malaysia

PUTRAJAYA: The Domestic Trade, Cooperatives, and Consumerism ministry has seized some 9.1 million litres of diesel and property worth RM58 million since mounting ‘Operasi Diesel Selatan’ in the southern states last month. ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
5

7 weeks ago

Girl, 9, awarded RM2.78m compensation for medical negligence

Jun 6 2014 4:56am CDT | Source: Business Times Malaysia

KUALA LUMPUR: A nine-year-old girl who suffered brain damage during her birth at a government hospital was awarded over RM2. ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
4

7 weeks ago

Malaysia's total trade in April up 12pc

Jun 5 2014 11:52pm CDT | Source: Business Times Malaysia

KUALA LUMPUR: Malaysia's total trade in April 2014 rose by 12 per cent from a year ago to RM123.86 billion due to growing trading activities, International Trade and Industry Ministe ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
3

7 weeks ago

Works Ministry to spend RM20m for upgrading works at 50 accident black spots

Jun 4 2014 11:35pm CDT | Source: Business Times Malaysia

JOHOR BARU: The Works Ministry will implement upgrading works at 50 accident prone locations in the country that have been identified this year involving a ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
2

7 weeks ago

Najib launches loan scheme for Ramadan traders

Jun 4 2014 10:24pm CDT | Source: Business Times Malaysia

PUTRAJAYA: Prime Minister Datuk Seri Najib Razak today launches RM45 million Ramadan ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 
Update
1

7 weeks ago

Residents bring up objection against Kidex to Suhakam

Jun 4 2014 4:49am CDT | Source: Business Times Malaysia

PETALING JAYA: A group of 20 Petaling Jaya residents held a meeting with the Human Rights Commission of Malaysia (Suhakam) over their objection against the proposed RM2.2 billion Ki ...
Source: Business Times Malaysia   Full article at: Business Times Malaysia
 

 

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