Daniel sent us this one — he's asking why inflation is treated as a feature of a well-functioning economy rather than a bug. If prices just keep trending upward year after year, then salaries have to run just to stay in place, and anyone holding cash watches their purchasing power evaporate. His question is blunt: wouldn't it be better if the standard was neutral inflation — zero — so ordinary savers aren't stuck in a race they keep losing? And honestly, if you've got ten thousand dollars in a savings account and you check what it buys today versus what it bought twenty years ago, the question kind of asks itself.
The number is brutal. Ten thousand dollars in the year two thousand buys about sixty-four hundred dollars' worth of stuff today. That's a thirty-six percent loss of purchasing power — no bank failure, no stock crash, just the slow grind of two percent inflation compounding for a couple of decades. And central bankers call this healthy. So Daniel's question cuts right to the tension: healthy for whom?
That's the thing. If your financial plan is "put money in the bank and leave it alone," the system is designed to eat your lunch. But the people designing the system know that. They're not idiots, and they're not cartoon villains. So what's the argument?
The argument starts with a fact most people don't sit with: prices in the United States have risen in roughly ninety-five percent of all years since nineteen thirteen. This isn't a recent phenomenon, it's not a policy failure — it's structural. It's baked into an economy that runs on credit. And the two percent target that everybody now treats as gospel? That's actually a relatively recent invention. New Zealand was the first country to formally adopt inflation targeting in nineteen ninety. The Fed didn't make it official until twenty twelve, though they'd been operating with an implicit target for years. The European Central Bank and the Bank of Japan followed similar paths through the nineties and early two thousands.
The two percent target isn't some ancient wisdom handed down from Mount Economics. It's a policy choice from the last thirty years. Which makes Daniel's question even sharper — if we chose this recently, could we have chosen differently?
That's exactly the right question. And to answer it, we have to understand why zero inflation sounds great in theory but scares the daylights out of central bankers in practice. There are really three layers here. First, the mechanism that makes inflation sticky — why prices drift upward even when nobody's trying to make them drift upward. Second, who actually wins and loses in an inflationary system, because the story is more complicated than "savers lose." And third, what real alternatives look like — could we actually run an economy at zero inflation, or would that create worse problems?
Let's start with the mechanism, because this is where the "why can't we just stop" question gets its answer. If nobody wants inflation, why does it keep happening?
The core of it is something called downward nominal wage rigidity. Fancy term, simple idea: firms really, really hate cutting nominal wages. If you're making twenty dollars an hour and your employer needs to reduce labor costs, they will almost never say "we're cutting you to nineteen fifty." They'll freeze hiring, they'll reduce hours, they'll offer buyouts, they'll do layoffs — anything before cutting the dollar amount on your paycheck. The behavioral economics literature on this is extensive. Workers perceive nominal wage cuts as deeply unfair, morale tanks, productivity collapses. So firms avoid it at almost any cost.
Which means wages only move one direction in normal times — up. Even if it's slow.
And if wages only go up, firms have to pass those costs somewhere. They raise prices to maintain margins. Workers then need higher wages to keep up with prices. Firms raise prices again. This is the wage-price spiral, and it creates a built-in upward drift. It's not a conspiracy, it's just the aggregate result of millions of individual decisions that each make sense in isolation. No single firm can break the cycle without getting punished by the market.
We've got this ratchet effect. Wages can't go down, so prices trend up. But that still doesn't explain why central banks actively target two percent instead of, say, zero. Why add fuel to a fire that's already burning?
This is where the zero lower bound enters the story, and it's probably the single most important concept for understanding the two percent target. Central banks fight recessions by cutting interest rates. Lower rates make borrowing cheaper, which stimulates spending and investment. But interest rates can't go meaningfully below zero — you can't charge people to hold deposits without them just pulling their money out as cash. Zero is the floor. If inflation is already at zero percent, then the central bank's policy rate is also near zero during normal times. When a recession hits, they have nowhere to cut. They're out of ammunition.
The two percent inflation target is essentially a buffer. It gives central banks room to cut rates without hitting the floor.
With two percent inflation, the neutral interest rate — the rate that neither stimulates nor restrains the economy — sits around two to three percent. When a recession hits, the Fed can cut by several percentage points before reaching zero. The two thousand eight financial crisis is the textbook example. The Fed cut rates from over five percent all the way to near zero. If they'd started at one percent — which is roughly where they'd be with zero inflation — they'd have had almost no room to respond. And we saw what happened even with that full range of cuts: they still needed quantitative easing, trillions in asset purchases, because zero wasn't low enough.
Then there's Japan.
Japan is the cautionary tale that cemented the two percent consensus globally. From nineteen ninety-five to two thousand five, Japan experienced average annual deflation of about negative zero point three percent. That sounds tiny. Who cares about prices falling by a fraction of a percent? But GDP growth over that same period averaged just half a percent per year. The economy basically flatlined for a decade. The mechanism is what Irving Fisher described back in nineteen thirty-three: when prices fall, the real value of debt rises. If you owe two hundred thousand dollars on a mortgage and prices drop, you're now paying back that loan with dollars that are worth more than when you borrowed them. The debt burden grows in real terms. People cut spending to service debts, demand falls further, prices fall further, and the spiral feeds itself.
Fisher called it debt deflation. And it's the nightmare scenario that keeps central bankers up at night, because once you're in that spiral, monetary policy stops working. You can cut rates to zero and it doesn't matter — nobody wants to borrow when the real cost of repayment is rising.
The historical record on deflation is genuinely terrifying. The Great Depression saw prices fall by about twenty-five percent. Unemployment hit twenty-five percent. Bank failures cascaded because borrowers couldn't repay loans that were growing in real terms. The nineteen twenty to twenty-one depression saw wholesale prices fall fifteen percent — but that episode is sometimes cited as a counterexample because recovery was rapid. The catch is that was under a gold standard with far less private debt in the economy. The total debt-to-GDP ratio was a fraction of what it is today. You can't compare the two.
Zero inflation isn't a stable equilibrium. It's a knife's edge with deflation on one side, and the historical record says deflation is much worse than moderate inflation. That's the institutional argument. But there's another piece here that doesn't get enough attention: measurement. The two percent target might not actually be two percent.
This is a really important nuance. The Consumer Price Index, the CPI, has known biases. It overstates true inflation by somewhere between half a percent and one percent per year. Part of that is substitution bias — when beef gets expensive, people buy chicken, but the CPI basket doesn't adjust instantly. Part of it is quality improvement — a car today is vastly better than a car in nineteen ninety, but some of the price increase reflects that quality gain, not pure inflation. The Boskin Commission in nineteen ninety-six estimated the overstatement at about one point one percent annually. More recent estimates put it lower, but still meaningful. So when the Fed targets two percent CPI inflation, true underlying inflation might be closer to one or one and a half percent.
Which means we're closer to price stability than the headline number suggests. But even so, we're not at zero. And for someone with cash in the bank, the distinction between one percent erosion and two percent erosion is a matter of degree, not kind. The money is still shrinking.
And this is where we need to follow the money and ask who actually wins and loses. Because the simple story — "inflation hurts savers" — is true but incomplete. It hurts some savers and helps others.
Let's talk about the saver who's been getting crushed.
From two thousand to twenty twenty, the average real return on US savings accounts was negative one point two percent annually after accounting for CPI inflation. That's two decades where cash in the bank guaranteed a loss of purchasing power. If you were a prudent saver doing exactly what financial common sense told you to do — put money aside, earn interest, build a cushion — the system punished you. And this isn't ancient history. The recent inflation spike in twenty twenty-one through twenty twenty-three saw inflation peak above nine percent while savings accounts were still paying fractions of a percent. The gap was enormous.
That's the experience Daniel's pointing to. Ordinary savers who followed the rules and got burned. So why do central bankers not see this as a policy failure?
Because they're looking at the whole balance sheet, not just the savings account. The S and P five hundred has returned about seven percent annually in real terms since nineteen twenty-six. Real estate has appreciated substantially over long horizons. The problem isn't that inflation destroys all wealth — it's that inflation destroys cash wealth while inflating asset wealth. And asset ownership is wildly unequal. The top ten percent of US households own eighty-nine percent of directly held stocks and mutual funds. The bottom fifty percent hold most of their wealth in cash, bank deposits, and home equity if they're lucky enough to own a home. So inflation acts as a regressive transfer mechanism — it quietly moves purchasing power from cash holders to asset holders.
That's the hidden transfer. And it's not a bug in the system, it's a feature that nobody campaigns on because nobody would vote for it if you described it plainly. "We're going to gradually transfer wealth from your savings account to people who own stocks and real estate." Not exactly a winning slogan.
Here's where the picture gets more complicated — and I want to be fair to the full data. The relationship between inflation and wages isn't as simple as "wages always lag." Real wage growth — wages after inflation — averaged two and a half percent annually from nineteen forty-seven to nineteen seventy-three. That was a period of relatively low inflation and strong unions, and workers saw genuine gains in purchasing power. From nineteen seventy-three to twenty twenty-three, real wage growth averaged just zero point three percent annually. That's basically flat for fifty years.
The problem isn't inflation per se. It's that something broke in the wage-setting mechanism around nineteen seventy-three. Productivity kept rising, but wages stopped tracking it.
The Economic Policy Institute has documented this extensively. From nineteen forty-eight to nineteen seventy-three, productivity grew about ninety-seven percent and hourly compensation grew about ninety-one percent — they moved together. From nineteen seventy-three to twenty twenty-two, productivity grew about sixty-five percent, but hourly compensation grew only about seventeen percent. The decoupling is stark. Inflation is the background condition, but the real story is the collapse of wage bargaining power, the decline of unions, the financialization of the economy, and a whole set of structural changes that meant workers stopped getting their share of productivity gains.
Which reframes Daniel's question. It's not "why does inflation exist?" It's "why don't wages keep up?" And those are different problems with different solutions.
The twenty twenty-one to twenty twenty-three inflation shock actually demonstrated this in real time. It was a stress test. Inflation spiked to levels we hadn't seen in forty years. But the labor market was unusually tight — unemployment hit multi-decade lows. And what happened? Lower-wage workers saw real wage gains. The bottom quartile of earners actually came out ahead during a period of high inflation because employers had to compete for workers. Meanwhile, middle-class savers with fixed-rate mortgages benefited from having their debt eroded in real terms. Their three percent thirty-year mortgage suddenly looked like a gift when inflation was running at seven or eight percent.
The distributional effects were all over the place. Some people got hammered, some people came out ahead, and it depended entirely on your specific mix of assets, debts, and labor market position.
The nineteen seventies tell a similar story with different winners. Inflation peaked at fourteen percent, which was devastating for cash savers and renters. But if you owned a home with a fixed-rate thirty-year mortgage, inflation halved the real value of your debt. Your nominal payment stayed the same while your nominal income rose with inflation. Homeowners got a massive wealth transfer, effectively paid for by the erosion of everyone else's purchasing power.
We've got a system where inflation is structurally necessary — because of downward wage rigidity and the zero lower bound — but its effects are distributed in ways that feel random and unfair. The question becomes: what do we do about it? Daniel's instinct is to eliminate inflation. But if that's not feasible without risking deflationary spirals, what's the alternative?
There are really two levels to this. One is personal: what should an individual saver do? The other is systemic: what policies would make the system fairer without breaking the monetary mechanics?
Let's start personal. If you're the ordinary saver Daniel's worried about, what's the move?
The single biggest risk for savers isn't inflation — it's holding only cash and cash equivalents. If your entire savings strategy is a bank account, you are guaranteed to lose purchasing power over time. That's not a prediction, it's arithmetic. The practical fix is diversification into assets that historically outpace inflation. Treasury Inflation-Protected Securities — TIPS — are the most direct hedge. Their principal adjusts with CPI, so your purchasing power is preserved by design. Series I savings bonds do the same thing for smaller savers, though with purchase limits. Beyond that, broad equity index funds and real estate have historically provided real returns over long horizons.
That's fine advice for someone with disposable income to invest. But it also kind of proves Daniel's point. The system is set up so that you can't just save money — you have to become an investor. You have to take on risk. The prudent saver who just wants to put money aside and not think about it is structurally disadvantaged.
That's a completely fair critique. And it points to the systemic level. If inflation is a permanent feature of the economy, and if its benefits flow disproportionately to asset owners, then a fair system would make sure everyone has a stake in asset appreciation. This isn't a new idea. Norway has been doing it for decades.
The sovereign wealth fund.
Norway's Government Pension Fund Global hit one point seven trillion dollars in twenty twenty-four. That's roughly three hundred ten thousand dollars per Norwegian citizen. Every person in Norway is effectively a shareholder in a massive, globally diversified portfolio. The fund owns about one and a half percent of all publicly traded companies worldwide. When asset prices rise with inflation, every Norwegian benefits — not just the wealthy. It's a universal hedge.
The Norwegian approach essentially acknowledges that inflation will happen, asset prices will rise with it, and the only way to make that fair is to give everyone a piece of the action. It decouples household financial health from the arbitrary distribution of inflation's effects.
And there are proposals to do something similar in the United States. Senator Cory Booker's American Opportunity Accounts — sometimes called "baby bonds" — would create a publicly funded investment account for every child at birth, with larger deposits for lower-income families. By age eighteen, each account holder would have a meaningful stake in financial assets. It's a way of saying: if the economy is going to run on inflation-fueled asset appreciation, then everyone should start with some assets.
Another approach is wage indexation. If the problem is that wages don't keep up, why not tie the minimum wage and Social Security to productivity growth plus inflation, not just CPI? That way, workers automatically get their share of economic growth without having to win it through bargaining every few years.
Several European countries already do versions of this. Belgium has automatic wage indexation tied to a health index that excludes alcohol, tobacco, and fuel. Luxembourg has a similar system. It's not perfect — critics argue it can embed inflationary expectations — but it does solve the problem of wages perpetually lagging prices during normal times.
The deeper policy fix isn't zero inflation. It's universal asset ownership combined with wage indexation. That way, you don't have to eliminate inflation to protect ordinary savers — you just make sure inflation's benefits are broadly shared instead of concentrated.
That reframes the entire conversation. The question isn't "how do we eliminate inflation?" — because the answer is probably "we can't without risking something worse." The question is "how do we distribute inflation's effects fairly?" Two percent inflation with universal asset ownership and productivity-linked wages looks very different from two percent inflation where the bottom half of households hold only cash.
Let's pull this together. Daniel asked whether inflation is a standard feature of a well-functioning economy, and whether we'd be better off targeting neutral inflation. The evidence says: yes, moderate inflation is a standard feature, because downward wage rigidity creates an upward drift in prices, and the zero lower bound means central banks need a buffer to fight recessions. Zero inflation isn't a stable equilibrium — it's a knife's edge with deflation on one side, and deflation is historically catastrophic. The nineteen twenty to twenty-one recovery gets cited as a counterexample, but that economy had far less debt and a gold standard that functioned very differently.
The two percent target specifically isn't arbitrary. It reflects a deliberate compromise: enough inflation to give central banks room to cut rates, but not so much that it distorts economic decision-making. The measurement bias in CPI means true inflation is probably closer to one or one and a half percent anyway, so we're not far from effective price stability. The target is a buffer, not a ceiling.
For individual savers, the actionable takeaway is that cash is a guaranteed loser over long horizons. The real risk isn't inflation — it's holding only cash. Diversification into TIPS, I-bonds, equities, and real estate isn't speculation; it's a practical hedge against a system that's designed to erode cash purchasing power. But that's an individual solution to a collective problem.
The collective solution is structural. If we could redesign monetary policy from scratch, we'd probably still choose moderate positive inflation — the deflation risk is too severe. But we'd pair it with something like a universal inflation dividend: baby bonds, expanded sovereign wealth funds, automatic wage indexation tied to productivity. The goal isn't to stop the race between wages and prices. It's to make sure everyone has a lane.
That's the open question worth sitting with. Central banks have spent thirty years building consensus around the two percent target. They've largely succeeded — inflation expectations are anchored, the deflationary spirals of the nineteen thirties and Japan's lost decade haven't recurred. But the distributional question has been almost entirely neglected. If inflation is a permanent feature of the system, then a fair system requires permanent mechanisms to share its benefits.
Digital currencies might change this calculus. Central bank digital currencies — CBDCs — would let central banks send money directly to citizens during crises. Imagine a recession where, instead of cutting rates and hoping banks lend, the Fed credits every American's digital wallet with five hundred dollars instantly. That changes the distributional game entirely. The inflation-distribution link becomes a policy lever, not an accident of who owns what assets.
The final thought is this: inflation is a feature of a credit-based economy, not a bug. The race between wages and prices is real, and ordinary savers have legitimate grievances about how the system has treated them. But the solution isn't stopping the race — it's making sure everyone's in it. The question isn't "why two percent?" It's "two percent for whom?
Now: Hilbert's daily fun fact.
Hilbert: The net height at the center of a real tennis court is three feet, but the net drops to just two feet at the walls — an optical illusion that makes the court appear level when viewed from the dedans, though the floor is actually slightly cambered. During the Cold War, the Simpson Desert's surface temperature was once recorded at nearly seventy degrees Celsius, but the handful of real tennis courts in Australia are all in coastal cities, none within a thousand kilometers of that heat.
I have absolutely no idea what to do with that information.
This has been My Weird Prompts. If you want to send us your own question about economics, physics, or why your savings account feels like a slow-motion heist, email the show at show at my weird prompts dot com. We're Corn and Herman Poppleberry, and we'll be back next week.
