The cardinal rule of central banking, in the United States and in most other advanced industrial nations, is that annual inflation should run around 2 percent.
But as the Federal Reserve prepares to start raising its benchmark interest rate later this year to keep future inflation from exceeding that pace, it is facing persistent questions about the wisdom of the rule and the possible benefits of significantly increasing its target.
Higher inflation could disrupt economic activity, but it also would enhance the Fed’s power to stimulate the economy during recessions. And some experts say the struggles of the Fed and other central banks to provide enough stimulus since the Great Recession suggest they could use more room for maneuvering.
. . . .
The case for raising the 2 percent target rests on the counterintuitive idea that moderate inflation is a good thing, helping to grease the wheels of commerce and prevent an outright fall in prices. This is widely accepted by economists. It is the reason that central banks aim for a modest inflation rate, rather than keeping prices at the same level from year to year. The question is, How much?
On goes the Sarcastic Hat.
Indeed, all the smartest people know that it is important for consumers’ purchasing power to diminish year to year by some amount determined by central planners. The experts make a convincing case that our purchasing power isn’t plummeting fast enough.
I think they should start by targeting the specific industries that have a demonstrated history of dangerous deflation, like computers. Everyone knows that computers keep getting better all the time, while prices get lower. This is an intolerable and dangerous situation, for the same sound reasons that general deflation would be intolerable and dangerous. If the prices of computers keeping dropping, consumers will wait to buy computers. Also, companies making computers will not be profitable. These are the arguments we always hear about general deflation and I don’t see why they shouldn’t apply to the computer industry.
The conclusion is clear. Government needs to take action to ensure that the prices of computers does not decline, but rather increases, steadily. Ideally, the price increase will occur at a rate determined by government bureaucrats living in Washington, D.C., who have no personal stake in the success of the companies. I think that would be for the best, don’t you?
And to those who say that better and cheaper products (like computers) are a good thing for consumers, I say: don’t you guys understand economics??
Next thing you know, you guys will be saying the real problem is excessive taxation and regulation, and that the government needs to get out of the way and let the free market allocate resources according to the individual decisions of consumers. That, I hope most people realize, is crazy talk. The very thought should be illegal to think and I am going to go draft a law to ban such thoughts right now. Be right back; talk amongst yourselves.