John Chapman
In just two years, inflation targeting (namely, the quest for 2 percent inflation) has gone from the lunatic fringe of economics to mainstream dogma. Much of the allure springs from notions that a little inflation motivates people to speed up spending, thereby greatly increasing the efficacy of central bank stimulus. It is touted as a cure for sagging demand and a defense against the (overly) dreaded deflation.
Other benefits include melting away some of the massive government and private debts and improving people’s perception of progress as they see their nominal wages rise. Employers can lower real wages without unpopular dollar pay cuts. The Fed can allow price increases to signal the need for production responses, allow for minor supply shocks and for monopolistic industries to increase prices all without a monetary response that would hurt other elements of the economy.
For the politicians it provides a tax windfall in the form of capital gains taxes on inflated assets and income taxes on interest that simply reflects inflation. It also necessitates printing more money thereby earning seigniorage (profits from printing money) for the government. In addition, it provides cover for competitive currency devaluation and is a great excuse to kick the can down the road: “Let’s not tighten before we reach our highly desired inflation target.”
What’s Magical about 2 Percent Inflation?
Then there is the question of why 2 percent?...
https://mises.org/blog/chasing-2-percent-inflation-really-bad-idea
This piqued my interest because before FBNC went all Trump all the time, I listened regularly to the Business Channel. Repeatedly and frequently the talking-heads would state that the 0% interest rate was depressing growth and that we needed to develop some inflation. I never heard any of them ever say that inflation was a bad thing, and I've been wondering for months why they would think it's a good thing.
