Central Banks’ 2% Plan To Impoverish You

The 2% target is low enough that the household frogs in the kettle of hot water never realize they’re being boiled alive because the increase is so gradual.

A comment by correspondent David C. suggested the importance of demonstrating the impoverishing consequences of central banks reaching their 2% inflation target. David observed: “That central bankers aren’t all hanging by their necks from lamp posts everywhere is a testament to how scarce are those who grasp exponents and compounding.”

Anyone with basic Excel skills can calculate the cumulative impoverishment caused by central banks’ “modest” 2% annual inflation. Here is my worksheet:

Column 1: year
Column 2: index starting with 100
Column 3: annual inflation sum (2% of previous year’s total index)
Column 4: cumulative total index

1    100.00  2.00  102.00
2    102.00  2.04  104.04
3    104.04  2.08  106.12
4    106.12  2.12  108.24
5    108.24  2.16  110.41
6    110.41  2.21  112.62
7    112.62  2.25  114.87
8    114.87  2.30  117.17
9    117.17  2.34  119.51
10  119.51  2.39  121.90

Ten years of modest 2% inflation robs households of nearly 20% of their purchasing power. What was $100 in year 1 costs about $122 after 10 years of “modest” 2% inflation. Put another way, $100 in year one is only worth $81 in year 10.

11  121.90  2.44  124.34
12  124.34  2.49  126.82
13  126.82  2.54  129.36
14  129.36  2.59  131.95
15  131.95  2.64  134.59
16  134.59  2.69  137.28
17  137.28  2.75  140.02
18  140.02  2.80  142.82
19  142.82  2.86  145.68
20  145.68  2.91  148.59

Two decades of “modest” 2% inflation robs households of one-third of their purchasing power. What was $100 in year 1 costs about $150 after 20 years of “modest” 2% inflation. Put another way, $100 in year one is only worth $66 in year 20.
Even when central banks fail to reach their 2% annual-thievery target, incomes decline across the entire spectrum. The middle class (however you define it) lost roughly 10% as of 2012. In Japan, famous for essentially no inflation, wages have fallen by 9% in real terms since 1997.