Inflation Target & Blanchflower Telegraph Interview

[crapstones]

Okay so I admit I'm an Engineer and I didn't get involved much with economics, and that's a proper Engineer by the way, that designs real things, not a "financial engineer" which I regard as the worst example of the abuse of the title Engineer since car mechanics started using it.

Can someone explain why, in the Telegraph interview with Blanchflower, he's concerned that inflation will fall too far below the MPC 2% target? Surely if it does that's a good thing right?

I thought the target was set at 2% so to be an achievable target, i.e. a 0% target would be really great, but in the real world they'd never be able to do this so 2% was a more realistic target for them to aim for, and to not go above 3%.

[crapstones]

Okay so I admit I'm an Engineer and I didn't get involved much with economics, and that's a proper Engineer by the way, that designs real things, not a "financial engineer" which I regard as the worst example of the abuse of the title Engineer since car mechanics started using it.

Can someone explain why, in the Telegraph interview with Blanchflower, he's concerned that inflation will fall too far below the MPC 2% target? Surely if it does that's a good thing right?

I thought the target was set at 2% so to be an achievable target, i.e. a 0% target would be really great, but in the real world they'd never be able to do this so 2% was a more realistic target for them to aim for, and to not go above 3%.

[Jason]

The theory is if inflation is too high, people would just take on debt to buy things and let inflation erode that debt. If it's too low, or negative, people would always put off buying as it will cheaper [in real terms] in the future.

Interest rates should counter-balance inflation, so if inflation is 2% interest rates must be the same or great to encourage saving, and less to discourage saving. However, the CPI (the 2% target) is not living inflation, as there is great debate to what the real figure - but it's a lot higher. Secondly, you pay tax on savings interest to further complicate this.

You could say exactly this has happened in housing, where house price inflation has been hyper so people just borrow what ever it takes as the debt is eroded compared to the house price - i.e. they believe they can just sell it if times get tough.

[crapstones]

Thanks for the answer. As I understand it now, they want a 2% target to strike a balance between people saving and actually going out and spending money, otherwise they're afraid people are just going to hoard it up under the mattress if we had 0% inflation.

[interestrateripoff]

The theory is if inflation is too high, people would just take on debt to buy things and let inflation erode that debt. If it's too low, or negative, people would always put off buying as it will cheaper [in real terms] in the future.

Interest rates should counter-balance inflation, so if inflation is 2% interest rates must be the same or great to encourage saving, and less to discourage saving. However, the CPI (the 2% target) is not living inflation, as there is great debate to what the real figure - but it's a lot higher. Secondly, you pay tax on savings interest to further complicate this.

You could say exactly this has happened in housing, where house price inflation has been hyper so people just borrow what ever it takes as the debt is eroded compared to the house price - i.e. they believe they can just sell it if times get tough.

I think this idea is slightly flawed. I'm not going to buy a loaf of bread as it will be cheaper tomorrow??? It's a simplistic view which simply doesn't add up. People would eventually have to buy otherwise nothing would happen. Ultimately this view of the economy is fatally flawed.

Why a 2% inflation target?

Why not 3% or 4%

Would 4% inflation really be damaging?

This idea fits if you don't ask too many questions, yes house prices increased because of this but it was something that couldn't continue as naturally they would reach a point which people simply could not afford so prices would correct themselves and come down.

[RufflesTheGuineaPig]

You could say exactly this has happened in housing, where house price inflation has been hyper so people just borrow what ever it takes as the debt is eroded compared to the house price - i.e. they believe they can just sell it if times get tough.

And becuase people don't understand the difference between WAGE inflation and PRICE inflation.

[Jason]

Why a 2% inflation target?

Why not 3% or 4%

Would 4% inflation really be damaging?

Well, the 2% target was to be in-line with the EU. However, you could quite easily have a higher target as long as interest rates matched. They are obvious problems with your currency devaluing fast than everyone else's, and retailers would have to change prices more often (I remember Merv King talking about this).

They are of course many other issues why an inflation target is used, and I'm sure it will be just another period in the history books we will refer to.

[Dylan]

Okay so I admit I'm an Engineer and I didn't get involved much with economics, and that's a proper Engineer by the way, that designs real things, not a "financial engineer" which I regard as the worst example of the abuse of the title Engineer since car mechanics started using it.

Language changes, get over it. No one's going to accidentally go to a car mechanic when they want a bridge built. Unless you define yourself by your job title, what's the problem?

[Shunnyonions]

I think this idea is slightly flawed. I'm not going to buy a loaf of bread as it will be cheaper tomorrow??? It's a simplistic view which simply doesn't add up. People would eventually have to buy otherwise nothing would happen. Ultimately this view of the economy is fatally flawed.

Why a 2% inflation target?

Why not 3% or 4%

Would 4% inflation really be damaging?

This idea fits if you don't ask too many questions, yes house prices increased because of this but it was something that couldn't continue as naturally they would reach a point which people simply could not afford so prices would correct themselves and come down.

Good question. Someone must have done a few spreadsheet-model type thingies and 2% has popped out as the optimum inflation rate.

[BearNecessities]

Always worth remembering that during Major's ill fated ERM membership, the inflation target was zero

[the_austrian]

The Bank of England decide the rate at which new money is added to the economy. Currently new money growth is at 14.4% (link here). David Blanchflower is known as a "dove" because he wants this rate to be higher. Someone who wants this rate to be lower is known as a hawk (an example being Tim Besley).

[Sour Mash]

And becuase people don't understand the difference between WAGE inflation and PRICE inflation.

More like because they don't understand the distinction between inflation and price rises.

[Yoss]

http://www.bloomberg.com/apps/news?pid=206...&refer=home

No Comment

[cells]

most of you are wrong, the 2% target has nothing to do with people being encouraged to spend blah blah blah

we have inflation for a few reasons, here are the major ones that pop into my head at this moment

1: get out card for political ****** ups. if a government pays to much wages then inflation can erode it if they give sub inflation pay increases. ask someone to take a decrease and your MP second home will be torched. its politically easier to do it via inflation. this is the main reason imo

2: you can make massive amounts of money playing inflation as you can take on massive amounts of debt, nearly unlimited. but you cant take on "savings". the best thing you can do is sell all you have and hold cash to profit from deflation. so there isn't the magnitude to make vast profits from deflation like there is from inflation. this is another big incentive for inflation rather than deflation.

3: so politicians can say dumb things like "the average person earns 10,000 more now then when the last person was in power, look at how great we are". they tend to forget to add "please ignor the fact that bread is 2x the price please"

4: the target is 2% instead of say 200% because you need the people to hold the currency. in countries that have 100% or more inflation a year as soon as someone gets paid they buy something with it as the money is losing value so fast (halving a year). general economic theory would say this is the best thing since sliced bread as people are spending money. in reality what people do is buy gold or silver or land or other currencies that are not inflating so much (usually dollars). so this isnt spending, this is storing wealth. this leads to a spiral of inflation as no one holds the currency and this is what leads to hyperinflation and you get Zimbabwe. this is why the target isn't 200% or 100% or... ect

5: why 2% instead of 3% or 1% or 5%?? I don't know but changing it from 2% to something else will be a kick in the gonads of foreign investors who buy your debt and you don't want to kick the person funding you in the gonads!

ect ect ect

[the_austrian]

The Bank of England decide the rate at which new money is added to the economy. Currently new money growth is at 14.4% (link here). David Blanchflower is known as a "dove" because he wants this rate to be higher. Someone who wants this rate to be lower is known as a hawk (an example being Tim Besley).

Also notice that in the press a hawk (which already has negative connotations like "war hawk") is described as an "arch" hawk similar to an "arch enemy" or "arch nemesis". A dove, on the other hand (already with peaceful connotations) is described as a "king dove".

Could there be subliminal suggestions here? Are doves (who want more inflation) nicer than hawks (who want less inflation)?

http://www.telegraph.co.uk/money/main.jhtm...0/bcnmpc120.xml

Voting by MPC members was identical to the July meeting, with arch hawk Tim Besley voting for a quarter percentage point rise in rates and king dove David Blanchflower voting for a quarter percentage point cut.

[1929crash]

Thanks for the answer. As I understand it now, they want a 2% target to strike a balance between people saving and actually going out and spending money, otherwise they're afraid people are just going to hoard it up under the mattress if we had 0% inflation.

Inflation redistributes wealth from creditors (rich) to debtors (poor) so I think it's potentially a good thing, unlike most here on HPC.

The other point - and this is pretty central - is that if you aim for too low an inflation figure you will end up by lengthening the dole queues. IMO that's a very real possibility.