Deflation - Inflation - Hyper Inflation & Interest Rates Questions?

[very_452001]

Hello,

Central Banks monetary policy is to meet inflation rate of lets say 2-3% set by Government fiscal policy right?

Why governments want prices of all the goods and services we pay for to be increased 2-3% yearly in a compounding way?

Why cant inflation be at 0% where prices of goods/services are stable constant throughout time? For this to happen central banks got to stop printing money right?


What is deflation, is it below the above mentioned target rate of 2-3% or below 0% inflation? Is there such thing as negative inflation or is just known as deflation?


Central banks get their statistics/prices of good/services data from past data history right in like a price index of what we pay for stuff to see how high inflation is now? How is this consumer price index is weighted?

The question is do the central banks get this data from essential good/services like food, drink, energy, healthcare, education that we need to survive on or from non essential good/services like holidays, tv's, phones, blenders, PlayStations, cars etc.?

Most non essential goods are from china which is cheap anyway so do central banks derive their current inflation figures from this non essential data that gives a false low below target inflation reading?

Lets look at the essential food items that everybody buys to survive on like bread/milk/eggs etc., since the 2008 crash has these prices steadily gone up to all time high prices now? If that is the case then we can rule out and say there's no deflation right?

Central banks have been printing so much money this year so how do they claim current inflation is below target? Doesn't make any sense.

Okay questions on interest rates:

- Looking at past charts high inflation is correlated high interest rates? Central banks say high interest rates are a sign of a good economy however why is there high inflation in a good economy when central banks don't print a lot of money in this correlated times? In this time there's less debt, savers get rewarded so what causes high inflation to make prices to sky high in this correlated time?

- Central banks say low interest rates are signs of a bad economy and they lower interest rates to get everybody borrowing cheap money at low rates to buy things that suppose to stimulate the economy higher so how this low interest rates is correlated to low inflation rates were having now when central banks are printing a lot of money in this correlated times? In this time theres more debt, debtors get rewarded so what causes low inflation to stop prices going sky high in this correlated time?

- Will low interest rates cause real estate property prices to continue going higher because it attracts a lot of buyers to cheap mortgages at low rates that increases demand pushing prices up and vice versa when interest rates rise? Real estate was cheap back in the 80's 90's but interest rates were high back then at like 15-19% not like 2-3% were getting today.

- If interest rates go negative then that means the borrower gets paid interest right?

- Is it possible to get times that makes economic sense where there is high interest & low inflation correlated and also low interest & high inflation correlated or does it always has to be not making sense that is high interest=high inflation and also low interest = low inflation cycles that we always go through?

[Lorence.xD]

Inflation is not a bad thing, when it is maintained as is, that means that the economy is growing, when there is inflation, it helps the production in theory. Zero inflation means that the economy is leading into a deflation which means that there is a lot of production but little demand which will cause work lay-offs and lower wages. I do not have much knowledge about interest but one thing is for sure, if the real estate prices go up because of this, eventually another bubble will burst and it will replicate the 2008 housing crisis in the US.

[Darker45]

Too many questions. Anyway, one of the reasons why there is inflation is that governments want people to spend their money. You need to spend today because tomorrow the prices will be rising. As a result, the economy is very much alive. People are spending now because the prices of the goods and services are constantly increasing.

Deflation is the opposite. That basically means the prices of goods and services are decreasing. This is not preferred by our current financial and economic systems because people might put off purchases because they want to buy goods and services cheaply. As a result, money would circulate less and slow and the economy might not move.

[magneto]

Central Banks monetary policy is to meet inflation rate of lets say 2-3% set by Government fiscal policy right?

I'm fairly sure that it is monetary policy across the world generally use this inflation target to anchor expectations. This has nothing to do with fiscal policy.

Why governments want prices of all the goods and services we pay for to be increased 2-3% yearly in a compounding way?

The theory is that a sustained low level of inflation allows for consumption decisions to be pushed forward, maximising economic output. Very rarely does this actually happen though. Right now a lot of countries around the world are fighting deflationary pressures.

Why cant inflation be at 0% where prices of goods/services are stable constant throughout time? For this to happen central banks got to stop printing money right?

It could. But as I mentioned, this is deemed to sacrifice short term output.

What is deflation, is it below the above mentioned target rate of 2-3% or below 0% inflation? Is there such thing as negative inflation or is just known as deflation?

Below target inflation is still inflation. Deflation is strictly when inflation rate is negative.

Central banks get their statistics/prices of good/services data from past data history right in like a price index of what we pay for stuff to see how high inflation is now? How is this consumer price index is weighted?

It depends on your country's statistical methods. But generally you'll see a basket of goods that represent the typical consumer's expenditures. Note that this is headline inflation - a lot of countries use underlying inflation for policy formulation because it gets rid of the more volatile classes (e.g. electricity).

Most non essential goods are from china which is cheap anyway so do central banks derive their current inflation figures from this non essential data that gives a false low below target inflation reading?

It depends on weighting. If these goods are weighted properly I don't see how they give a "false low" inflation.

Central banks have been printing so much money this year so how do they claim current inflation is below target? Doesn't make any sense.

Because inflation does not only depend on money supply. Aggregate demand plays arguably the biggest role. If people are getting money but aren't spending it in the economy, it makes sense that prices of goods don't necessarily expand even though the money supply has.

[TofuDefi]

Hello,

Central Banks monetary policy is to meet inflation rate of lets say 2-3% set by Government fiscal policy right?

Why governments want prices of all the goods and services we pay for to be increased 2-3% yearly in a compounding way?

Why cant inflation be at 0% where prices of goods/services are stable constant throughout time? For this to happen central banks got to stop printing money right?

If inflation is 0% then there is no incentive for people to spend money or put them in the bank or invest in stock market. So a lot of capital won't work for economy in this case.

[Wexnident]

Central banks have been printing so much money this year so how do they claim current inflation is below target? Doesn't make any sense.

Are we talking about the funds that were sent to the people during the pandemic? If so, afaik, that action was actually done so as to stimulate the market. With how the market remained stagnant back then, the central bank had to do something since a stagnant economy isn't something one wants in their country. As for the idea of a zero inflation world, well, that just leads to a direct decrease in almost everything related to the economy. The decrease in production, decrease in wages, decrease in prices. You can also look up the disadvantages of zero inflation compared to low inflation, but imo the general idea of why it isn't something to be done is because it promotes low growth in the economy of a country.

[odolvlobo]

Central Banks monetary policy is to meet inflation rate of lets say 2-3% set by Government fiscal policy right?
Why governments want prices of all the goods and services we pay for to be increased 2-3% yearly in a compounding way?
What is deflation, is it below the above mentioned target rate of 2-3% or below 0% inflation? Is there such thing as negative inflation or is just known as deflation?

The idea is that inflation discourages saving money and encourages spending it or investing it, Keynesian economists tend to believe that spending the key to prosperity.
Deflation is the opposite of inflation. Prices fall. You could call it negative inflation.

Central banks get their statistics/prices of good/services data from past data history right in like a price index of what we pay for stuff to see how high inflation is now? How is this consumer price index is weighted?
The question is do the central banks get this data from essential good/services like food, drink, energy, healthcare, education that we need to survive on or from non essential good/services like holidays, tv's, phones, blenders, PlayStations, cars etc.?
Most non essential goods are from china which is cheap anyway so do central banks derive their current inflation figures from this non essential data that gives a false low below target inflation reading?
Lets look at the essential food items that everybody buys to survive on like bread/milk/eggs etc., since the 2008 crash has these prices steadily gone up to all time high prices now? If that is the case then we can rule out and say there's no deflation right?
Central banks have been printing so much money this year so how do they claim current inflation is below target? Doesn't make any sense.

The inflation numbers come from government agencies (Bureau of Labor Statistics in the U.S.). The agencies track the retail prices of thousands of items and calculate various measures of inflation from the changes in those prices. In the U.S., the measure that is usually reported is the Consumer Price Index for All Urban Consumers, but there are others. The Federal Reserve looks primarily at the Personal consumption expenditures index (PCE).

Inflation is measured by prices because that is what affects people directly, and there is no correlation (in the short-term) between money printing and inflation.

- Looking at past charts high inflation is correlated high interest rates? Central banks say high interest rates are a sign of a good economy however why is there high inflation in a good economy when central banks don't print a lot of money in this correlated times? In this time there's less debt, savers get rewarded so what causes high inflation to make prices to sky high in this correlated time?

- Central banks say low interest rates are signs of a bad economy and they lower interest rates to get everybody borrowing cheap money at low rates to buy things that suppose to stimulate the economy higher so how this low interest rates is correlated to low inflation rates were having now when central banks are printing a lot of money in this correlated times? In this time theres more debt, debtors get rewarded so what causes low inflation to stop prices going sky high in this correlated time?

Inflation reduces the amount of money that lenders make, so higher inflation discourages lending and lowers the supply of loans, leading to higher interests. Lower inflation has the opposite effect.

In a good economy, the demand for loans is high, so interest rates go up. In a bad economy, the demand for loans is lower, so interest rates go down. However, the economy is a very dynamic system. Low interest rates now tend to lead to high inflation in the future and high interest rates now tend to lead to low inflation in the future.

- Will low interest rates cause real estate property prices to continue going higher because it attracts a lot of buyers to cheap mortgages at low rates that increases demand pushing prices up and vice versa when interest rates rise? Real estate was cheap back in the 80's 90's but interest rates were high back then at like 15-19% not like 2-3% were getting today.
- If interest rates go negative then that means the borrower gets paid interest right?
- Is it possible to get times that makes economic sense where there is high interest & low inflation correlated and also low interest & high inflation correlated or does it always has to be not making sense that is high interest=high inflation and also low interest = low inflation cycles that we always go through?

-Yes
-Yes
-High interest/low inflation or low interest/high inflation would be unusual, but note that central banks can buy and sell bonds with printed money and this gives them the special ability to lower interest rates while raising inflation and vice versa.

[mnporter2001]

Too many questions. Anyway, one of the reasons why there is inflation is that governments want people to spend their money. You need to spend today because tomorrow the prices will be rising. As a result, the economy is very much alive. People are spending now because the prices of the goods and services are constantly increasing.

I don't think this is a true definition of inflation. All countries need a moderate level of inflation to show that it has been a steady year of growth for a country.
Do not be too negative about the authorities in your country, they will only try to run the country so that it develops as best as possible so that people's lives are safe.

[odolvlobo]

I don't think this is a true definition of inflation. All countries need a moderate level of inflation to show that it has been a steady year of growth for a country.

Inflation is not a measure of growth, but GDP (Gross Domestic Product) is. Interestingly, there are two types of GDP, nominal and real. Nominal GDP is the measured value, but real GDP is the value after deducting inflation. Real GDP is the actual measure of growth.

For example, assume your nominal GDP is 3%. If inflation is 0%, then the real GDP is 3%, and that's a healthy value for GDP because it keeps up with population growth. However, if inflation is 4%, then the the real GDP is -1%, which is a bad for an economy because it means that everyone is becoming poorer.

[Darker45]

Too many questions. Anyway, one of the reasons why there is inflation is that governments want people to spend their money. You need to spend today because tomorrow the prices will be rising. As a result, the economy is very much alive. People are spending now because the prices of the goods and services are constantly increasing.

I don't think this is a true definition of inflation. All countries need a moderate level of inflation to show that it has been a steady year of growth for a country.
Do not be too negative about the authorities in your country, they will only try to run the country so that it develops as best as possible so that people's lives are safe.

I'm not even defining inflation. I'm just explaining one of the reasons why there is inflation. That's an integral part of our current economic paradigm. But inflation has to be always moderated and kept in check so that, as pointed out by odolvlobo, it won't overtake the GDP itself. Otherwise, it would be an economic disaster itself.

This is not at all a negative way of looking at the authorities. As I've implied in my previous post, inflation is necessary. It has to be there for money to get out of people's wallets and therefore for commerce to run resulting in a thriving business community. And if the business community is doing well, their goods and services sold, there are jobs, tax revenue for the government, and the demand for raw and other materials from producers.

In other words, everything boils down to people spending money. They need to. And one of the ways to compel them to spend is to have inflation.

[davis196]

Why the politicians want inflation?The answer is simple and it's called "inflation tax".
Inflation actually helps for increasing the tax revenue.Many countries have higher VAT taxes,which depend on the prices of consumer goods and services.Higher prices means higher VAT tax revenue.
The same things happens with property taxes.Higher property prices means higher property tax revenue.
Higher prices means more pressure inside the economy to increase the salaries.Bigger salaries mean bigger taxable income.
Anyway,lower inflation can be helpful for boosting the economy,because people have that "money illusion" about their income actually growing.
In reality,the real growth minus the inflation is way lower(even negative sometimes).

[el kaka22]

The idea simply would mean "we are getting paid more, hence why we are getting richer, and we can afford to pay stuff more" type of deal at its core. I know everyone would want to live in a world where prices of goods stay the same whereas our salaries increase but remember those goods are produced by some people who needs to get richer as well. Which means if everything goes up by 2% including your wages and price of everything, that would be good inflation because we are all getting rich at the same time all together.

However if it becomes too much, that would hurt the economy because our salaries may not catch up to it, or if it is negative that means we will not be paid as well but pay less as well so become a poor nation where others can take advantage of.

[Ucy]

Hello,

Central Banks monetary policy is to meet inflation rate of lets say 2-3% set by Government fiscal policy right?

Why governments want prices of all the goods and services we pay for to be increased 2-3% yearly in a compounding way?

Why cant inflation be at 0% where prices of goods/services are stable constant throughout time? For this to happen central banks got to stop printing money right?

Prices of goods and services will always increase in price due to demand and supply unless there is deliberate measure to keep them stable as long as possible. If you totally leave them to natural market forces/activities or without intervention, they will likely increase in price when supply is low, and decrease when supply is high.

Government printing alots of money for buying particular goods and services that can't be produced quickly enough to replace the sold ones will decrease the supply of the goods/services or make them scarce hence price inflation of the goods/services

[TofuDefi]

Hello,

Central Banks monetary policy is to meet inflation rate of lets say 2-3% set by Government fiscal policy right?

Why governments want prices of all the goods and services we pay for to be increased 2-3% yearly in a compounding way?

Why cant inflation be at 0% where prices of goods/services are stable constant throughout time? For this to happen central banks got to stop printing money right?

Prices of goods and services will always increase in price due to demand and supply unless there is deliberate measure to keep them stable as long as possible. If you totally leave them to natural market forces/activities or without intervention, they will likely increase in price when supply is low, and decrease when supply is high.

Government printing alots of money for buying particular goods and services that can't be produced quickly enough to replace the sold ones will decrease the supply of the goods/services or make them scarce hence price inflation of the goods/services

Governments don't print money, they borrow money. Most governments don't have power to print money since WWII.

[drlukacs]

- If interest rates go negative then that means the borrower gets paid interest right?

Yes, the borrower gets even more. This is because the economic resources are too weak and the government needs to make money out so people have the money to implement their business ideas or increase production. Even companies that have a business plan or expand market share will receive higher returns than the average person.
This happened in Japan in the 1990s that the government had to enforce that policy in order for the economy to grow again.

[odolvlobo]

Prices of goods and services will always increase in price due to demand and supply unless there is deliberate measure to keep them stable as long as possible. If you totally leave them to natural market forces/activities or without intervention, they will likely increase in price when supply is low, and decrease when supply is high.
Government printing alots of money for buying particular goods and services that can't be produced quickly enough to replace the sold ones will decrease the supply of the goods/services or make them scarce hence price inflation of the goods/services

Governments don't print money, they borrow money. Most governments don't have power to print money since WWII.

If you are going to nitpick, you need to know your facts. The U.S. government has the legal ability to mint coins. It's in its constitution.

Don't you remember a few years ago when people were proposing the idea of minting a 1 trillion dollar coin?

[magneto]

Why the politicians want inflation?The answer is simple and it's called "inflation tax".
Inflation actually helps for increasing the tax revenue.Many countries have higher VAT taxes,which depend on the prices of consumer goods and services.Higher prices means higher VAT tax revenue.

You're right on the tax revenue part. Indeed, inflation can lead to a significant amount of "bracket creep" that increases tax revenue - but is this necessarily the reason there is a 2-3% inflation target? Absolutely not.

Anyway,lower inflation can be helpful for boosting the economy,because people have that "money illusion" about their income actually growing.
In reality,the real growth minus the inflation is way lower(even negative sometimes).

You're also right in saying that nominal income is an illusion.

But I think what you miss is that there is generally a correlation between inflation (to a moderate extent) and real GDP. People tend to respond to higher prices for whatever reason (sticky prices, for instance) by producing more real output. Is it rational to increase real production when only nominal wages increase? Absolutely not. But that's the general observation.

[jaysabi]

Inflation is necessary. Money is just a representation of value and a medium of exchange for unlike goods/services.  At any given time, the value of money is how much goods/services there are in the world available for consumption right at that time divided by how much money there is in the world at that time. If you grow a bushel of apples and sell it at market, you receive money for that. But once those apples are consumed or spoiled, they're no longer available for consumption, so why would you expect the money that was related to their production to continue to have any value? It makes sense that over time, the money that represents consumable goods to be inflated away because they're no longer available for consumption.

[odolvlobo]

...At any given time, the value of money is how much goods/services there are in the world available for consumption right at that time divided by how much money there is in the world at that time.

That is not correct because money can be reused.

... If you grow a bushel of apples and sell it at market, you receive money for that. But once those apples are consumed or spoiled, they're no longer available for consumption, so why would you expect the money that was related to their production to continue to have any value?

Because more apples will be produced to take their place.

[Ucy]

Hello,

Central Banks monetary policy is to meet inflation rate of lets say 2-3% set by Government fiscal policy right?

Why governments want prices of all the goods and services we pay for to be increased 2-3% yearly in a compounding way?

Why cant inflation be at 0% where prices of goods/services are stable constant throughout time? For this to happen central banks got to stop printing money right?

Prices of goods and services will always increase in price due to demand and supply unless there is deliberate measure to keep them stable as long as possible. If you totally leave them to natural market forces/activities or without intervention, they will likely increase in price when supply is low, and decrease when supply is high.

Government printing alots of money for buying particular goods and services that can't be produced quickly enough to replace the sold ones will decrease the supply of the goods/services or make them scarce hence price inflation of the goods/services

Governments don't print money, they borrow money. Most governments don't have power to print money since WWII.

Your post looks abit contradictory.
 If most don't have power to print money, how about the others? Do they have power to print money? If yes, which governments? And why did you say this:
 

Government don't print money, they borrow money.

I guess you made it clear here 👇 that you are referring to most, and not all governments:

Most governments don't have power to print money since WWII.

Anyway, government includes Central Bank in my opinion. Is Central bank not part of government? Or who prints the money?
By the way, I don't see why governments should not be able to print money if they are following the right rules guiding the money printing and using the money well.