The second half of their argument I have a lot of time for: deflation is a danger to be avoided at just about all costs, in my opinion. That a fall in the value of the currency might destroy real opportunity in the economy is unforgivable in my opinion, and it’s right that the Bank should steer clear of it.
Deflation is a rise in the value of the currency.
But equally, I see no reason at all why we should keep inflation to 2% so that the owners of debt (and debt ownership is the basis of wealth) should have their asset values preserved, which is the only reason why I can see the current target is so low.
Would the world end if the target was 3%? Or 4%? Or even 5%? I’m not suggesting any more than that, and might only go for doubling to 4% to be honest. The obvious answer is it would not.
No, that’s not why the target is where it is. The biggest damage caused by inflation is that it screws the price system. It’s the changing relative prices of goods and services which are the useful signals in an economy. Consistent and large inflation masks those. We all just lose track if you like. Deflation is also bad, worse even. Thus, the target is set where we get the least of the distortion of the price system while still avoiding the deflation.
And that rate of inflation would allow for wage growth in proportion to asset prices – and most specifically house prices – which is vital.
Everyone recall how wages kept up with house prices in the 1970s when we had higher inflation?
Such a rate may also allow real wage rises – which has to be good.
4% inflation will increase the likelihood of real wage rises?
Critically, this inflation target would also mean that interest rates need not rise – rate rises that will tip millions into unmanageable debt scenarios and which might precipitate a new banking crisis as a result.
Higher inflation will not increase market determined interest rates? Jeebus, which planet is Ritchie phoning this in from?
There are reasonable – maybe not good but reasonable – arguments for a rise in the inflation target. Amazing that the Senior Lecturer has managed to stumble across absolutely none of them.