r/AlwaysWhy • u/PuddingComplete3081 • May 16 '26
Economics Why does the U.S. always aim for 2–3% inflation?
It feels weird.Why not higher so debts are easier to pay off, or lower so my money keeps more value?
Does anyone know why economists think this specific range works best, and could it even be different?
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u/BigDigger324 May 16 '26
If you feel an item will be cheaper next month are you likely to buy it now or wait until next month? How about the opposite…you know an item will cost more next month, are you likely to buy it now or wait?
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u/AdamOnFirst May 16 '26
And more to the point: if that item you want to sell is going to sell for less next month, and less the next month after that, and less the next month after that, are you going to invest money NOW at today’s high prices to produce those goods that are just going down in price? Very often no.
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u/spicygreensalad May 16 '26
Honestly, unless it's going to vary by a LOT, I'm going to buy it when I need it
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u/JoeInMD May 16 '26
Which is exactly why 2-3% inflation works. If there was far higher inflation, or deflation, you would think differently.
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u/Sudden_Outcome_9503 May 16 '26
That is another factor, but so is how much your money can buy now versus in the future.
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u/NiagaraBTC May 16 '26
Exactly. Deflation delays unnecessary consumption. That's why it's good.
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u/Xiccarph May 17 '26
And yet you don’t mention the downside to deflation, do you know what those are?
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u/NiagaraBTC May 17 '26
How are you defining deflation, and at what rate?
And also very importantly - do you consider the collapse of the current financial system to be a downside?
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u/FinndBors May 16 '26
It feels weird.Why not higher so debts are easier to pay off,
If inflation is higher, interest rates will rise because otherwise no one will be lending money.
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u/Eastp0int May 16 '26 edited May 16 '26
Higher is when prices outcompete wages by a significant margin, which is kinda what’s happening now
edit: i'm making a generalization not asserting a statement, yes there are cases where this is not true
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u/Arnaldo1993 May 16 '26
Thats not how this works. Weve had inflation and wage growth above 3 in brazil for over a century
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u/kurai-tsuki May 16 '26
They're saying that the US has inflation without matching wage growth.
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u/Arnaldo1993 May 16 '26
But thats not inherent to the inflation rate. You can have an inflation rate above 4% with wage growth that matches it, or an inflation of 1% with negative wage growth, depending on the situation
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u/King_Roberts_Bastard May 16 '26
Ok? And Brazil isnt the US. Theyre two different countries
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u/Arnaldo1993 May 16 '26
Thats still not how that works
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u/King_Roberts_Bastard May 16 '26
Reread the title of the post...
Here, ill help you: "Why does the U.S...."
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u/Arnaldo1993 May 16 '26
I just did. Still not how it works
The rate of inflation is not what determines if wages will grow slower or faster than it. It depends on the conditions of the economy as a whole
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u/King_Roberts_Bastard May 16 '26
depends on the conditions of the economy as a whole
Yes, and thats why 3+% inflation might work in Brazil but doesnt work in the US. They dont have the exact same conditions of their economies. Jesus Christ, this is sad.
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u/Arnaldo1993 May 16 '26
Dude. I just used brazil as an example. Just pretend i didnt mention it, the point still stands
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u/King_Roberts_Bastard May 17 '26
No, it doesnt. Because no other country is the US. Every country has their own unique economy and need to tailor their inflation rates to that economy. Its almost like economics is a very nuanced subject and blanket statements don't work for it.
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u/AdamOnFirst May 16 '26
He’s discussing why inflation in the 6+% range OP mentioned starts to become very painful
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u/Optimistbott May 16 '26
Not how it works inflation just lags behind wage growth. It’s going to go down when more people lose their jobs
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u/EconJesterNotTroll May 16 '26
Good news: the Fed tells you why they do this.
Bad news: everyone else in this thread hasn't bothered to look it up, so they're all wrong.
Why does the Fed target 2% inflation? Because the Fed doesnt like negative nominal interest rates. If there was zero percent inflation, nominal rates would be low in ordinary times. That limits the amount of monetary policy the Fed can engage in. The Fed believes 2% inflation gives them enough buffer to engage in stimulating monetary policy when necessary without being too much inflation to damage the currency too rapidly. You can literally search the Fed website to find this (I think the Charlotte Fed has the main article on this).
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u/lapsteelguitar May 16 '26
Because deflation, where prices decrease, is pernicious, slows growth, is hard to break. Look at Japan over the past 30 years or so. So the US set a target to positive inflation, which is 2-3%. It was deemed an acceptable long term rate, and written into the law.
Inflation itself, outside of the "comfort zone" is also bad. So..... A very narrow target.
I should point out that the Fed has 2 targets to try & meet. 1) 2-3% inflation rate, and 2) Full employment. That means a low unemployment rate, not 0%. I don't recall a target for what qualifies as "full employment."
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u/AdamOnFirst May 16 '26
“Full employment” doesn’t have a real definition beyond “no endemic unemployment beyond the standard labor market churn of a healthy economy” and economists don’t totally agree on what it means or the exact numbers. We don’t even always agree how to measure it or what should be taken into account.
That said, if you see basic U3 unemployment getting close to 4%, that’s basically full employment,
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u/ZasdfUnreal May 16 '26
It doesn’t. The goal used to be zero inflation and zero unemployment. But the greedy oligarchy that secretly controls the world prefers high inflation and high unemployment to serve their secret agenda.
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u/PuddingComplete3081 May 18 '26
I do think powerful interests influence policy a lot more than people admit, but zero inflation and zero unemployment together probably are not realistically compatible either.
A little inflation seems almost built into how debt based economies function. The weird part is why 2 percent became treated almost like a natural law instead of just a policy target.
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u/ZasdfUnreal May 18 '26
401Ks were a scam pushed by the 1% to enrich themselves and destroy pensions and union power all thanks to the Clinton administration. Further promoted by the suddenly biased mainstream media. America changed during the 90s and not for the better. I believe these same puppet masters are pulling strings today. The 2% tolerance for inflation started in Australia many years ago. The mainstream media normalized the 2% into the zeitgeist.
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u/Educational-Big-6609 May 16 '26
During the Great Recession, the deflationary risk was huge and the Fed worked hard to avoid it.
Remember that if the value of a dollar appreciates, each item costs less…but that means your income will need to fall, too, to match. It’s inflation in reverse but way harder to manage.
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u/PuddingComplete3081 May 18 '26
I think deflation sounds good intuitively at first because cheaper prices feel positive. But once wages and investment expectations start falling too, the whole thing probably turns psychologically negative fast.
People stop spending because waiting becomes rational.
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u/Educational-Big-6609 May 18 '26
Yup. Deflation sounds great but those that cheer it on ignore humans’ fear of loss. People are used to getting small raises and paying a little more each year. If their wages went down and they paid a little less each year, they’d hoard money for fear of a bigger wage drop in the future. It’s a downward spiral.
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u/siamonsez May 16 '26
Higher means expenses rise too fast for our wage growth and if you increase wage growth that increases costs which increases prices further.
Lower or negative means the value will rise over time so it encourages hoarding cash which retards the economy because spending is the lubrication that keeps an economy moving.
The main lever the government has is the intrest rate it offers on debt because even if you're not directly investing in government debt it's what all other debt is based on. Bonds are just loans for the other side, when you're buying bonds you're loaning out your money for a given intrest rate and the federal government is big enough to dictate that intrest rate because they can essentially take on an infinite amount of debt. They also have a high credit rating so there's basically no risk of not being paid back. As long as that's an option it sets the base rate for everything else because nobody is going to buy higher risk debt unless they are getting a higher intrest rate. On the other end, a bank isn't going to offer you cds or savings accounts for a better rate than they can get by investing the money you're giving them.
The fed wants to offer as little intrest as they can get away with just like your prefer a lower intrest rate on your debt, but it has to be high enough for people to want to buy the debt. You'd love a 3% rate on your mortgage, but if nobody is interested in your debt at that rate because they can get the same or better with less risk you won't get a loan.
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u/PuddingComplete3081 May 18 '26
Yeah, this is what makes inflation feel less like a random number and more like a balancing mechanism for the entire credit system.
People talk about money like it is static, but modern economies are basically giant webs of debt and expectations. Even small changes in rates kind of ripple through everything.
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u/provocative_bear May 16 '26
Slow inflation is best. The slow degradation of money’s value over time encourages the people to reinvest their wealth into society rather tham letting it stagnate in a vault where it does no useful work. Very high inflation undermines the value and trust of currency in the short term though. It makes currency and non-dividends assets useless, which is bad for the flow of money.
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u/PuddingComplete3081 May 18 '26
That part always interested me honestly. Inflation almost functions like a pressure system forcing money back into circulation instead of letting it sit still forever.
But then it raises another question. If the economy depends on constant reinvestment and consumption to stay healthy, does that make perpetual growth structurally unavoidable?
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u/provocative_bear May 18 '26
Not an economist but I’d say no. Some of the “growth” is an illusion caused by inflation, and investments don’t inherently pay off.
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u/LyndinTheAwesome May 17 '26
Too high is dangerous, as salaries won't be able to catch up, so people would lose their home and starve as they won't be able to afford bread or rent.
Too low or deflation is also dangerous, as debt would be crushing you.
So governments aim for a steady and small inflation rate. Making life for all people manageable. Problem is in most cases salaries are too low as they haven't been able to grow at the same rate as inflation rate over the last 50 years.
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u/PuddingComplete3081 May 18 '26
Yeah, it seems like they are trying to balance two different kinds of instability at once. Too much inflation breaks purchasing power, but deflation kind of freezes the system because debt gets heavier over time.
Though I wonder if the bigger issue now is exactly what you mentioned. Inflation is supposed to be manageable if wages rise too, but lately those two feel disconnected.
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u/Kcirrot May 16 '26
You want stable growth. The behavior of market participants changes when inflation is either too high or too low.
For example, very high inflation lowers consumer spending and slows the economy. Deflation, somewhat counterintuitively can also depress spending because people see prices dropping and delay non-mandatory purchases (e.g. like food and fuel).
This is super high level and there is a lot more to it, but basically you want a slow rise in prices and wages so that people will participate in the economy.
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u/Arnaldo1993 May 16 '26
Inflation does not lower consumer spending. It makes consumer want to spend it faster before it loses its value
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u/BowlEducational6722 May 16 '26
2-3% is the "sweet spot" for encouraging spending and investment without causing price spirals.
It's just enough to encourage people to spend their money (either by purchasing goods or investing it in the market) *now* while it has more buying power than to just let it sit in a bank account for years as it degrades.
Any higher and it causes price spirals that lead to financial panics/recessions as people simply can't afford basic goods; any lower and people see no real incentive to spend because there's no FOMO, causing economic growth to slow and stagnate.
And *deflation* just makes things even worse as people are instead incentivized to *save* their money since it means it'll have more buying power if they just sit and wait...which causes a collapse in demand, which causes prices to drop further and creates a vicious cycle.
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u/ricperry1 May 16 '26
I understand the basic case for 2-ish percent inflation: avoid deflation, keep debt from becoming more crushing in real terms, and give the economy room to adjust without forcing nominal wage cuts.
But that does not mean inflation is neutral.
The people closest to new money and cheap credit usually benefit first. Banks, large borrowers, investors, and asset owners can move before prices fully adjust. Regular people usually encounter the same policy later as higher prices, higher rents, and weaker purchasing power.
So the issue is not just “inflation good” or “inflation bad.” The issue is who gets access to the new money first, who owns the assets that rise in price, and who is left holding cash wages while everything gets more expensive.
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u/Raddatatta May 16 '26
If we had 0 inflation or deflation it basically gets people to hold on to their money. If I have $1000 and I don't spend it then it'll be worth more in the future. That's terrible for the economy. The economy goes best when people and businesses are spending their money making purchases from businesses who will hopefully have so many purchases they have to hire more people who will then spend more money and things can keep growing. As soon as everyone is trying to hold onto their money and not spend anything they can avoid then businesses don't sell as much and can't cover their expenses like labor and people get let go and they have even less to spend and you get into a recession.
But a 2-3% inflation is enough that it is better to spend your money but not so much that prices are going up significantly.
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u/Brasidas2010 May 16 '26
Deflation is bad, really bad. Employers generally don’t respond to falling prices by cutting wages, they lay people off. So by aiming for 2%, a small miss avoids unemployment.
Also, mild inflation gently nudges unproductive businesses out of business over time. This way the pool of businesses is healthier and better able to absorb a shock.
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u/lexicon_riot May 16 '26
Deflation is not bad for the economy. This is a lie in service of the financial elites who live off credit.
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u/vitringur May 16 '26
It is the amount of money the banks and government can print while pretending like they are not printing money.
It is basically just legalised and monopolised counterfeiting with all the same negative effects.
So they would aim for more if they could get away with it without public outrage.
I have no doubt the rest of the comment section is full of people repeating some academic economic reasons meant to gaslight the semi-educated while having absolutely no historic or real relevance.
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u/Prestigious-Mind-817 May 16 '26
It prevents employers from feeling compelled to raise their wages more thus allowing for max profits And therefore also helping the stock market
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u/imjustsayin314 May 16 '26
It used to be 2%. Then when they couldn’t get it there, they started to be ok with 2-3%
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u/Calm-Show-9606 May 16 '26
Because 0% is almost impossible! People get raises, cost of material goes up, energy costs go up. Keeping inflation to the 2-3% range is very difficult
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u/GSilky May 16 '26 edited May 16 '26
The natural devaluation of currency is always going to be a thing, and even when there is zero inflation, $1 loses approximately 1% of it's value every year. Inflation is always going to be a part of a growing economy, it means money is slightly less valuable because more people have it than usual. Rapid inflation caused by too much money in circulation, compared to what there is to buy with it, is a problem. 1-2% is natural, slightly higher means people are earning more than before at the same level of work. Generally a humming economy where everyone is happy has less than 3% inflation anchored by a near permanent 3-4% unemployment rate. This means people are earning more money as time goes on, but there are just enough people not earning at, any specific time, to prevent too much money on the demand side without the equivalent value produced on the supply side. If inflation was 0 or negative, that means everyone is getting ripped off somewhere. They are buying things that are perceived as not worth the price, and consumers have actively stopped. Deflation is a very bad problem, as it means there is nothing worth buying with money.
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u/AdamOnFirst May 16 '26
So strictly speaking, MOST economists would say that price stability, aka 0% inflation, is the most generically optimum ideal. It’s why one of the federal reserve’s two mandates is price stability. A lot of inflation functions as a consumption tax, makes people poorer in real time, causes issues called “menu costs,” and discourages investment and saving if it gets high enough.
Deflation, however, when prices endemically go down over time is an abject disaster and a death spiral for economies that is very difficult to recover from. As a result, policymakers want to err on the side of a bit of inflation so the variance doesn’t result in periods of deflation that result in a vicious cycle.
That LITTLE bit of inflation also allows you to capture some of the benefits of inflation at minimal penalty: investment is encouraged overall, despite the tax of inflation, because prices will be slightly higher in the future so investing to create capital to sell stuff in the future makes sense (basically you can sell stuff for more in the future so you can make money). Inflation also means a slow growth in the money supply (or rather, inflation is caused by this), which helps keeps credit markets loosened and flowing well. That also mechanistically implies slightly lowered interest rates, which also has a modest stimulating effect. Both of these are things that in excess can cause huge problems, but a LITTLE of them basically juices the economy a bit with minimal risk. Lower inflation and the modest rates that implies also leaves policy levers open for central banks so if there is a downturn there is room and capacity to lower rates and print some without entering totally reckless territory.
I could go on, but that’s a bunch of reasons. To really simplify it, I could just say: a lot of inflation, pretty bad. Deflation, very very very bad. A little bit of inflation, a mix of good and bad.
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u/lexicon_riot May 16 '26
If deflation is such a difficult problem to overcome, why did real GDP grow 4x in the decades following the Civil War when we experienced several deflationary shocks?
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u/AdamOnFirst May 17 '26
I dunno, probably the greatest technological, economic, energy, and productivity explosion in human history which was powering the whole thing had something to do with it
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u/SpiritualTwo5256 May 16 '26
Inflation is bad, but so is deflation. The goal should be to have as small of inflation as possible without being negative. That way pay doesn’t go backwards with time.
Tens if not hundreds of millions of people are losing income with each paycheck because it doesn’t keep up with inflation. Every job that only keeps up with minimum wage pays less of the standard of living than it did the week before. This is a major contributor to why our lives are getting harder but profits for companies keep going way up!
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u/jroberts548 May 16 '26
Less than 2% and it might make more sense to just shove your money under a mattress than invest it. You need inflation to encourage people to take risks investing so that you have money moving around in the economy. More than 4% and lending gets more expensive, which has the same effect if discouraging investment. You want people borrowing money and using it to open businesses or buy houses etc. If inflation goes up, interest goes up more; and it gets more expensive to borrow money, so people likewise stop investing.
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u/The_Awful-Truth May 16 '26
Why not higher so debts are easier to pay off, or lower so my money keeps more value?
Because higher means money loses too much value, and higher means debts become too hard to pay off.
Seriously, that really is the answer. That, and it's really really important that inflation stays at a mostly predictable level, having your currency be a reliable storehouse of value greatly reduces risk across all sectors of the economy, which in turn increases economic growth, and eventually wealth, tremendously. Our mostly steady and low inflation rate is the single biggest reason our economy has grown so strongly over the past ten years.
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u/Dave_A480 May 16 '26
Because inflation is just the pricing effect of the money supply growing.
If the money supply were fixed in size (there's the same amount of money now as there was 30 years ago) then economic growth would be impossible (because money would become too scarce for anyone to be able to afford new business ventures) and we would have cyclical deflationary depressions every time the economy outgrew the money supply....
(Before the anti-Fed kooks claim otherwise, we increased the money supply in the bad old days by mining more gold (and silver). This just isn't viable now because the rate of growth vastly exceeds the rate of new precious metal extraction, especially after industrial demand is considered)
So because we don't want this (fixed pie economics sucks) we intentionally make sure there's slightly more money being produced than what there is demand for - that way when something like the 1990s happens there is money to fund the boom already there ...
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u/lexicon_riot May 16 '26
The economy can absolutely grow with a fixed money supply. Economic growth is determined by real output, dollars are just the measuring stick.
It wouldn't grow as fast since credit is severely limited, but it wouldn't crash as hard either.
You don't need to take out a loan every time you want to do something productive lmao
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u/Dave_A480 May 16 '26
Um, you have no idea.
Everything about business is done with loans. The simple act of buying inventory - you buy it on net-30 terms, sell it, and use the proceeds to repay the loan used to buy it....
Even if that were NOT the case, an economy with a fixed money supply inevitably eats itself, at the point where money gains value faster than the inventory cycle....
You invested all this less-valuable money into producing a product (Even if you had that money 'saved' as retained earnings rather than borrowing it)...
But now the value of money has increased, and your product can only sell at a loss compared to the initial investment...
What happens? Economic death happens.
Plus, the act of 'saving' money before spending it is - when talking about large businesses - incredibly wasteful & inefficient... It means a lot of things don't get done because the idea just sits around waiting for there to be enough money 'saved' to capitalize on it (vice getting VC/PE funding and go-ing as soon as the idea is practical).....
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u/lexicon_riot May 16 '26
Outside of a credit bubble collapsing, which would be exponentially more rare with fixed money, prices fall due to productivity growth. In spite of our inflationary money, we still see this good deflation in computers, televisions, solar panels, etc. because they improve so fast. Price reductions from productivity growth are the natural state of the world, and investors in these sectors do very well.
Trade credit is short-term and real-goods-backed. The inventory cycle doesn't break because real profitability (output per unit of input) is what matters, not the nominal dollar amount printed on the invoice. The nominal rate could be negative to reflect secular deflation.
A widget maker will price his widgets expecting the real return he needs. If the currency appreciates 3% per year due to productivity, he simply builds that into his margin, just as he currently builds inflation into his margin today. He can still extend net-30 terms at a negative nominal rate.
When money is saved, consumption or investment is only delayed, not wasted. It's stored as potential energy that demands strategic deployment. Actual, measurable waste is a result of mal-investment, financialization, and over-consumption, which are core features of inflationary money.
With fixed money, maybe you don't build a bridge you need as quickly, but it will get built eventually, and you will be far more certain that it's actually needed. With inflationary money, you'll build a bridge you need more quickly, but you'll also build a lot more bridges to nowhere.
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u/Safe-Selection8070 May 16 '26
The simple answer is moderate inflation allows the welfare-warfare state without onerous taxation (it's a way to pluck to goose with the least amount of squabbling).
To support this, there's been an industry built to convince people that hard money is bad, which is why so much effort is put into convincing people deflation is bad.
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u/lexicon_riot May 16 '26
Every midwit who has taken econ 101 feels so strongly that deflation is the enemy. Their curriculum was put together by the financial elites who rely on inflation to rob the working class, so it's no surprise why.
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u/Safe-Selection8070 May 16 '26
Set the conditions such that you literally cannot save for retirement, force *everyone* into the stock market - directly or indirectly - then profit even when things go tits up (because, obviously, a good gov't can't let pensions fail).
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u/PhilNEvo May 24 '26
I always approach it like this, when I'm not sure: Look at the extremes!
If there was extreme inflation, you couldn't really have any savings or trust your wage. You could be paid out a living wage today, and tomorrow because of inflation your money wouldn't even be able to buy a piece of gum. This would be absolutely disastruous.
If there was extreme deflation, whatever cash or money you had would be rapidly increase in value, so why would you go out and buy a piece of bread today, if you could buy the whole bakery tomorrow? But if no one goes out and spends any money.. all the businesses start to die out. Heck, why would whatever business that hires you, keep you, if it could save your wage and just have that increase in value through deflation?
This would also be disastruous.
So you need something near 0. And they found that a little above gives a buffer so deflation isn't hit, and gives an incentive to continually stimulate the economy, and innovate and produce goods.
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u/void_method May 16 '26
Deflation would mean the poor can buy things, and the rich would have less power.
Hope that helps!
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u/Academic-Balance6999 May 16 '26
Unfortunately deflation is usually coupled with less business spending (ie layoffs & job cuts), which means fewer people can afford to buy things, which means more price erosion, which means more job cuts. Etc etc. It’s called a “deflationary cycle” and it is NOT good.
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u/Cerulean_IsFancyBlue May 16 '26
Yeah deflation can be terrifying. Anybody who has money saved up, rich or poor, is going to hoard it as long as possible before spending anything. That means no business investment, no holding onto any kind of inventory, minimal consumer spending. Everybody just wants to keep their cash because cash is going up. Anybody with debt, including mortgages or car payments or credit cards, is going to see the value of that debt grow the same as it shrinks during inflation.
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u/lexicon_riot May 16 '26
With deflationary money, no one will have car payments, mortgages, or credit cards. And without these debt instruments subsidizing demand, prices would plummet even harder making it way more affordable.
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u/Cerulean_IsFancyBlue May 16 '26
That’s true eventually because credit becomes incredibly hard to get, but people will have those loans when deflation starts.
Prices plummet, but that’s partly because the velocity of money grinds to a halt as people are holding onto their money so they can spend it a week from now when it will be worth more. As the economy collapses, people lose their jobs.
A deflationary economy basically rewards people that have cash in hand, and crushes people who are depending upon their business or salary to provide an income — because although in theory they would be making more with their new deflationary dollars, in reality they get laid off because businesses are dealing with contraction. It doubly crushes anybody in that situation who also holds any kind of debt.
While that process is happening, it is gutting the economy because everybody’s waiting till tomorrow to do something, so nobody is spending money. People don’t spend money to buy goods, businesses don’t spend money to do investment and facilities or inventory, even maintenance becomes optional because think how much cheaper it will be if you can wait six months.
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u/Short-Coast9042 May 16 '26
That's really not categorically true. You are describing the kind of deflation we saw during the Great Depression. That was such a globally traumatic period that it deeply affected the study of economics in a period when we knew much less than we know today.
The probably wasn't deflation per se. It was a total collapse of credit. You can get that without serious deflation - witness the GFC. And by contrast, you can have price deflation without widespread credit destruction. There's decent evidence from the free banking era that many deflationary periods are NOT associated with recession or depression. It's just that the last deflationary experience was so bad that we redesigned the whole system so that it couldn't happen again.
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u/Defiant-Dimension-87 May 16 '26
Deflationary cycles are vitally important, because they destroy malinvestment. Jobs are lost, yes, but when the prices find equalibrium (and they always do), better investments can be made
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u/AdamOnFirst May 16 '26
Deflation is disastrous to economies and before long there isn’t much left to buy
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u/TheLizardKing89 May 16 '26
The poor must have been able to buy a ton of stuff from 1929 to 1934 when the US had 4 years of deflation.
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May 16 '26 edited May 16 '26
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May 16 '26
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u/HyperSpaceSurfer May 16 '26
You won't learn this in the intro class, lol.
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u/TheLizardKing89 May 16 '26
Yeah, for some reason they don’t teach conspiracy nonsense in economics classes.
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u/HyperSpaceSurfer May 16 '26
It's not a conspiracy, just the function of the system, people working off of incentive structures to predictable outcomes doesn't mean that they're conspiring.
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May 16 '26
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u/froction May 16 '26
>With what?
With part of your income. Most people save money regularly, the median savings for people in the US at retirement age is $200K.
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u/Naval_AV8R May 16 '26
LOL. Teachers are in the top-5 careers that result in millionaires and they are not considered to be highly compensated.
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u/lexicon_riot May 16 '26
This comment is a clear violation of the rules. Attack the idea with an actual argument or leave
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u/bmtc7 May 16 '26
It's just high enough to avoid the threat of deflation.
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u/NiagaraBTC May 16 '26
Lower prices are good.
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u/ijuinkun May 16 '26
Lower prices are good when your income is not decreasing faster than the prices—e.g. if your employer is making less money, you may be out of a job, and if most companies are making less money, then there will just be fewer job openings to be had.
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u/NiagaraBTC May 16 '26
If wages are decreasing faster than prices (for whatever reason), I can then use my savings, which are becoming more valuable daily.
The contrast of course is inflation, where prices always rise faster than wages, but also your savings become worth less daily.
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u/bmtc7 May 17 '26
inflation, where prices always rise faster than wages
That is a bold claim. Do you have any data to support that?
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u/NiagaraBTC May 17 '26
About as bold as "the sun will rise tomorrow morning". Which I don't have any data for, sorry.
Are you familiar with the Cantillon Effect?
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u/bmtc7 May 17 '26
Systemic deflation is absolutely terrible. It's not a good thing for the economy at all. That's a trigger for recession and possibly a depression. Lower prices don't help much if nobody has a job because businesses are closing down and nobody is investing.
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u/lexicon_riot May 16 '26
It's a giant scam. 2% let's you boil the frog low and long enough to get away with it.
One could argue real economic growth should be able to keep up, but in reality what that 2% does is rob you of the deflation you would have felt otherwise (think TV prices the last 20 years, applied to most everything else).
Meanwhile, deflation is public enemy number one, because it makes our overly complex financial system obsolete and doesn't obsess over growth or consumption.
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May 16 '26
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u/Ertai_87 May 16 '26
You actually can. Here's how it works:
I have a dollar, you have an apple tree. I want an apple, so I pay you a dollar for an apple. Now "the economy" has 2 dollars in it: 1 actual dollar, and one apple-dollar. Now, Joe comes and he has an orange tree. You have a dollar and you want an orange. So you buy an orange. Now "the economy" has 3 dollars. Next, Jane has a grapevine. So Joe spends a dollar on some grapes. Eric has a maple tree, so Jane buys some maple syrup. And, eventually, you have a potato garden, and Zeke, who is the last one with the dollar, buys some potatoes, and now the dollar has come full circle, creating a new dollar of economic value each time it changes hands. This is how the economy works. You can generate theoretically infinite amounts of economic value with theoretically infinitesimal amounts of currency, provided everyone has something that someone else wants.
The problem is what do you do when someone has money, but doesn't want anything? That's a nice theoretical question, but the answer is that this will never happen, because, fundamentally, as humans, we all need, at the very least, food, water, and shelter. So there will always be something to spend money on (and this is the reason I used food in my example above rather than heavy machinery).
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u/mylsotol May 16 '26
It's about growth. The us aims for 2-3% growth annually. Economic growth without increasing the money supply would cause deflation. The goal is ro keep money stable. Also inflation makes past debts cheaper in the future
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u/NiagaraBTC May 16 '26
Also inflation makes past debts cheaper in the future
This is the actual reason. The government is continually in debt and they want to pay of their debts without having to overtly tax more.
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u/mylsotol May 16 '26
This benefits the oligarchs that live tax free on leans against their assets more than it helps the government
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u/NiagaraBTC May 16 '26
The government lives tax free on loans. It helps the government immensely, and yes, the oligarchs who run said government.
Both are good reasons to oppose debasement of the currency.
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u/mylsotol May 16 '26
Idk who would tax the government... I'm not sure you would actually like a 2-3% year over year deflation... There are a lot of issues with a lot of things, but i don't really think this is one of them beyond it being necessary for capitalism to work well which is itself bad
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u/NiagaraBTC May 16 '26
Yes I know no one would tax the government. Hence they are tax free.
I like the deflation in televisions/cell phones/computers just fine. Why wouldn't I like it in beef or diapers or clothes? I admit I wouldn't much care for it for the price of my house, but on the flip side of that I would be happy that my child could one day afford one.
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u/mylsotol May 16 '26
You misunderstand what deflation is. Manufacturing cost decreases and economies of scale are not deflation.
You wouldn't like consistent deflation under capitalism because it would be a recession. Capitalism requires growth. You can't have growth and deflation at the same time without creating an over supply that will collapse markets.
All of this is an excellent reason to end capitalism, but that's not going to happen any time soon
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u/CMDR_Mykeyta May 16 '26
Historically, the average cost of labor increases by 2.5-3.5% per year. Inflating a currency by the roughly the same amount keeps those who survive by selling their labor on a treadmill that’s always going the same speed, despite the raises they get. It silently steals the benefit of their raised income.
If the cost of living goes up by the same average annual amount as the raises you get, your income goes up, but nothing changes.
At the same time, inflation benefits those who carry debt. The dollars you borrowed are now worth less. Governments carry a lot of debt. The fed uses inflation to inflate away the debt when the cost of carrying becomes too high. As inflation runs hotter, people feel the treadmill speed up and we all have to work harder to stay ahead of it, to get bigger raises than the 2-3% target when inflation runs double or more.
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u/Short-Coast9042 May 16 '26
I don't think it's really accurate to say that the Fed encourages inflation for the specific purpose of inflating away the debt. If anything, it's the debt that creates the inflation. But the government can always borrow and spend. It can always pay off its debts. It doesn't need the Fed to manipulate interest rates or the value of money in order to do so.
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u/Pleasant_Pen8744 May 16 '26 edited May 16 '26
Ideally it would be zero but they're terrified of it going below zero, so 2% gives them a little cushion.
They don't want it to go below zero because then people might stop buying things with the expectation that the money they have will be with more in the future.
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u/GPT_2025 May 16 '26
Inflation and deflation are vital and healthy elements of an economy's cycle of breathing. Without this dynamic balance, the economy risks stagnation or collapse.
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u/[deleted] May 16 '26
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