FEBRUARY 15
Inflation Is Not an Accident
When Success Means Your Money Buys Less
The Signal
Major central banks do not aim for zero inflation. They deliberately aim for prices to keep rising.
The Reading
Imagine being told the people responsible for price stability have succeeded perfectly. What would you expect? Prices stop rising? Your money holds its purchasing power? Now look at the target. The Federal Reserve targets 2% over the longer run, the European Central Bank 2% over the medium term and the Bank of Japan 2% for price stability. Zero is not the destination.
Two percent sounds tiny. Almost harmless. Make it real. A basket of goods costs $1,000 today. At exactly 2% inflation, after ten years it costs about $1,219. After twenty years, $1,486. After thirty years, $1,811. After roughly thirty-five years, about $2,000. The same basket. Twice the money.
Here is the part that should stop you. That is not what happens when a 2% inflation target fails. It is what happens when 2% inflation continues year after year. Inflation often runs above target, with central banks trying to bring it back toward 2%. This does not mean every burst of inflation is deliberately created. Wars, shortages and supply shocks can push prices higher. Individual prices differ. The Federal Reserve and European Central Bank acknowledge supply and energy shocks as inflationary forces. Yet in several of the world’s largest monetary systems, positive inflation is not an accident to eliminate. It is the stated objective.
For years you may have heard “price stability” and imagined stable prices. Look again. The frightening question is no longer, “What happens when inflation gets out of control?” It’s what happens to your money when inflation behaves exactly as intended?
First Principles
Inflation measures the rise in the general price level.
Major central banks deliberately target positive inflation rather than zero.
Small inflation rates compound into large price changes over years.
Today’s Challenge
Write: $1,000. Underneath: $2,000. At a steady 2% annual inflation, thirty-five years separate them.
If prices doubled during your working life, would you still call that “price stability”? Remember the price of some items ten years ago and what you pay now. Are central banks meeting their 2% targets?
Tomorrow’s Signal
The Tax Nobody Voted For