| The rate of change is much more important than the absolute inflation number in terms of how it effects workers and the economy. It's the rate of change in the inflation number that causes pain, more than the absolute percentage. There's nothing scientific about the Fed or other central banks targeting for 2% versus, say 5% or 10%. A finance minister in New Zealand suggested the 2% target in the 80's:
https://www.cfr.org/blog/history-and-future-federal-reserves.... Other central banks copied it and now it's set in stone. What matters is that everyone has an agreed upon expectation for what inflation will be. This is because the economy is based on expectations. Things only get bad when inflation moves suddenly higher or lower and it catches everyone off guard. All their annual projections are wrong and they have to make adjustments. So the absolute inflation number doesn't really matter, so long as it is steady and predictable. It is true though, that psychologically the higher number may have a negative effect on people. The 70's and 80's did have big inflation numbers, but what really causes the pain is the fluctuations. And in hindsight it's clear that the actual inflation number wasn't the problem, it was that no one knew what next years inflation rate would be. The point is: on an absolute basis, today's inflation rates are lower. But that's not what we should be paying so much attention to. It's the rate of change of inflation that matters. Moving from 2% to 8%, is effectively a 4x adjustment in expectations. Whereas going from 10% to 20% is just a 2x adjustment. |