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Speaker 1: Welcome to Ask Fear and Greed, where we answer questions

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Speaker 1: about business, investing, economics, politics, and more. Really, nothing's off

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Speaker 1: the table.

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Speaker 2: Oh, Michael Thompson, Hello, Sean Alm Hello Michael.

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Speaker 1: I say that nothing's off the table, as though we're

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Speaker 1: about to answer something that is just so left field,

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Speaker 1: But really it's kind of right in your wheelhouse.

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Speaker 2: This one that's about economics, Sean. Why just central banks

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Speaker 2: target two to three percent inflation?

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Speaker 1: What is it about that number that is the makes

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Speaker 1: it the magic number that they are all trying to

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Speaker 1: get to?

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Speaker 3: Yes, the magic target range. The funny thing is that

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Speaker 3: there's no specific reason, it's just what they think is

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Speaker 3: about right. So if you go to the Reserve Banks

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Speaker 3: website and I quote a powerful lesson from history is

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Speaker 3: that low and stable inflation is a prerequisite for a

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Speaker 3: strong economy and sustainful employment and growth in real wages.

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Speaker 3: All makes sense. Our goal is to keep and you'll

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Speaker 3: consier price inflation between two and three percent. It then says,

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Speaker 3: we believe that maintaining inflation within this range preserves the

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Speaker 3: purchasing power of money and encourages sustainable growth in the economy,

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Speaker 3: which benefits it all. That's all, we believe that maintaining

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Speaker 3: blah blah, There is no empirical evidence to say this

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Speaker 3: is absolutely where it should be. The Reserve Bank generally

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Speaker 3: believes that if you can hit somewhere between two and

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Speaker 3: three percent, perfectly two point five percent, that's going to

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Speaker 3: keep your economy growing. Okay, it's going to actually allow

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Speaker 3: prices to rise a bit, because you want price astorise

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Speaker 3: a bit. You do not want them to go backwards

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Speaker 3: and kind of things tick over.

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Speaker 2: Okay.

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Speaker 1: So then if inflation was, say at one point five,

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Speaker 1: what's the effect of that.

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Speaker 3: So one point five A few things. So if a

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Speaker 3: company is selling stuff for just one point five percent

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Speaker 3: like this, say's gone from a hundred dollars to one

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Speaker 3: hundred one dollars fifty cents, but their inputs might become

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Speaker 3: more expensive, or transport costs become more expensive or something

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Speaker 3: like that, Suddenly profits drop. That's a bad thing because

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Speaker 3: when profits drop, company says, well, actually we've been to

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Speaker 3: cut back staff. You can get into a sort of

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Speaker 3: economic slowdown. You actually want prices to rise. Generally, So

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Speaker 3: again one and a half percent. If I'm going to

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Speaker 3: negotiate my wage with Danski, the Grand puba of fearing greed. Yep,

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Speaker 3: And I say, Danscoe, I want a one and a

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Speaker 3: half percent pay rise, or you know, I want a

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Speaker 3: two percent pay rise or whatever. I mean, me only

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Speaker 3: getting one and a half percent, because that's what inflation.

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Speaker 3: That actually doesn't allow me to do much more, and

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Speaker 3: that's a bad thing. So what we want is the

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Speaker 3: economy is someone like me to be spending more money

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Speaker 3: in to tick the economy over that side of it.

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Speaker 3: The other side is if you've got five or six

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Speaker 3: percent inflation, as we've seen in recent times, massive costs

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Speaker 3: of living crisis.

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Speaker 2: Okay, So really in the end, it's not as though

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Speaker 2: it is a hard and fast rule that's it must

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Speaker 2: be between two and three percent, but on a balance

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Speaker 2: it's going to be. Yeah.

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Speaker 3: So other central banks don't have two and three percent, okay.

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Speaker 3: So the Fed may have come into that now, but

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Speaker 3: its target range is broader than that. So and then

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Speaker 3: some of the European banks are a bit different as well.

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Speaker 3: This is just what the Reserve Bank thinks. If we're

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Speaker 3: at two or three percent, you can have steady economic growth,

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Speaker 3: you can have a steady labor market, and you can

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Speaker 3: have steady price rises. And that's kind of the Goldilock's economy.

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Speaker 2: Is it too narrow do you think? Or is it

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Speaker 2: about right?

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Speaker 3: I think it's about right. Maybe that's just because that's

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Speaker 3: what I'm used to. But you want a target point,

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Speaker 3: so you probably want two and a half percent. That

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Speaker 3: makes sense. You want economic growth long term to be

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Speaker 3: slightly above inflation. That's probably two seventy five something like that.

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Speaker 3: If you just say two point five percent, you're never

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Speaker 3: going to hit it. If you say two to three percent,

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Speaker 3: you're sort of saying we're almost there. So I think

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Speaker 3: it just makes monetary policy easier if you have a

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Speaker 3: target rather than a set point. Okay, yes, I mean

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Speaker 3: with all economics it kind of the trend is always

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Speaker 3: your friend. So how you measure prices, like the CPI

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Speaker 3: consume a price index, it's a basket of goods. It's

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Speaker 3: not perfect either, so it's about right. You know, the

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Speaker 3: reserve being things, it's about two to three percent that

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Speaker 3: it should be, even interest rates rising and falling. They

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Speaker 3: do about something, not exactly, something not exactly, not really

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Speaker 3: an exact science economics.

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Speaker 1: I think that's good one. Thank you, Sean. I think

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Speaker 1: you as to that admirably A minus. No B plus admirably,

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Speaker 1: A minus that's too high. Body plus.

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Speaker 2: Yeah, I'm trying to kind of.

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Speaker 3: I don't know if plus does sound better than a minus.

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Speaker 2: Doesn't it? Would you be happy with a B plus?

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Speaker 3: No A minus? Thanks very much?

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Speaker 2: Okay, A minus it is, Thank you, Sean.

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Speaker 1: Now you Michael, remember, If you've got something that you

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Speaker 1: would like to know, then send three a question on LinkedIn, Instagram,

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Speaker 1: Facebook or at beeerandgreed.

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Speaker 2: Dot com dot au.

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Speaker 1: I'm Michael Thompson and this is asked Fear and Greed