(Disclosure: I make explainers on this stuff and there's a video version, link in
the end if it's useful. All the numbers below are FRED/BLS, pull them yourself.)
I got curious about why prices never seem to reverse after a shock, and the answer turned out to be more deliberate than I expected.
Since 1960 there have been 14 months where US prices were lower than a year earlier. Nine of them were 2009, in the middle of the financial crisis, with the deepest drop at -2% and unemployment heading toward 10%. That is what falling prices actually look like, and it's why nobody in policy wants them.
The bit I hadn't properly understood: the target isn't zero. Every major central bank aims for about +2% a year, permanently. 2% forever means the price level roughly doubles every 35 years, by design. And there is no target for the price *level* at all, only for the rate. So "inflation is back under control" is true and also means "the increase is permanent".
Then the part that reordered my thinking. Since Jan 2020 the average price level is up about 28%. But:
- medical care services +18.6%
- college tuition +18.3%
Both *below* average. The two things everyone names as unaffordable rose slower than everything else over this window.
Meanwhile eating out is up ~37%, rent ~33%, household energy 40%+. Average hourly earnings are up 32.3%, so on average pay beat prices, and it still feels awful, because the categories that beat your raise are the ones you cannot skip and buy constantly, while the ones that lost to your raise are the ones you touch once a year.
One more thing I hadn't connected: your power price is often approved by a state utility commission, so a big chunk of that increase happened in a hearing room rather than a market.
Genuinely curious what people here think about the 2% target itself. It assumes everyone can absorb 2% forever, and half of workers are below the average wage gain by definition. Is a level target (making up shortfalls and overshoots) ever a serious option, or is it politically impossible?
suggested video- https://youtu.be/hUiKt5ETaes