The Fed's 2-Percent Inflation Fairytale

Who made it up, what does it mean?

KINGSTON, NY, 4 November 2015—Once upon a time, not too long ago, central bank wizards began telling a fairytale that economies need inflation. But not just any inflation. In their Goldilocks make-believe world, the not too hot, not too cold, just right dose of two percent is needed to keep an economy healthy.

While there is absolutely no quantifiable data or economic model that proves or supports this oft-cited fairytale, the business media keep repeating it, selling the fiction that a two-percent inflation rate will somehow create jobs and spur economic growth.

“Worry Over Low Inflation Kept Fed at Bay,” screeched the Wall Street Journal, 9 October headline, following the release of Federal Reserve minutes in which they decided not to raise interest rates.

Who made this up? How is inflation – paying more for goods and services – the perfect financial tonic for working people to swallow? Crippled America: How ... Donald J. Trump Best Price: $1.48 Buy New $8.97 (as of 03:40 UTC - Details)

In the United States, for example, with wages trending between decline and stagnation, more inflation means paying more to get less. With median household income below 1999 levels, how can higher inflation stimulate more spending? How can higher inflation be beneficial when, according to new Social Security data, 63 percent of Americans make less than $40,000 per year?

As dismal as those numbers are, in countries around the world where unemployment is much higher and real income and wages have fallen more dramatically, central bank charlatans persist with their “we need inflation” refrain.

A headline in the Financial Times read: “Eurozone’s small rise in prices misses ECB inflation target.” And the article reported: “Prices ticked up across the eurozone this month, although they remain well short of the European Central Bank’s 2 percent inflation target needed to bolster the region’s economic recovery(FT, 31 October 2015).

The article bemoans that “the single currency area has long struggled with weak price pressures” and quotes ECB’s chief economist, Peter Praet, that it is ‘a duty’ for central bankers “to use all the instruments available to lift inflation back to target.” End the Fed Paul, Ron Buy New $9.99 (as of 11:15 UTC - Details)


Yes, there is a 2-percent eurozone inflation target that was set by the Maastricht Treaty and signed by 12 member nations in 1992. But it was not to meet a two percent inflation goal; it was NOT TO EXCEED it: “The criterion on price stability referred to in the first indent of Article 109j(I) of this treaty shall mean that a Member State has a price performance that is unsustainable and an average rate of inflation, observed over a period of one year before the examination, that does not exceed by more than 1.5 percentage points that of at most…”

Indeed, just months before the treaty was signed, the inflation rate in the Euro Area was running at an all time high of 5 percent.

Trend Forecast: Beyond wage contraction, resulting from global economic contraction, commodity prices have sharply fallen. Thus, low inflation is strictly a supply and demand issue that portends the onset of a long deflationary trend cycle.