Price Level Targeting

Categories: Econ

Ready...aim...fire! Ah, a near miss on that price level target. Try again, Fed.

Central banks, such as the Federal Reserve in the U.S., oftentimes try to hit a certain price level via price level targeting. These banks tinker with monetary policy, doing things like raising or lowering interest rates as if they're economic demigods to keep inflation at an ideal rate. Of course, ideal inflation rates are subjective, but in general: hyperinflation is bad, and low, stable inflation is considered good.

When there’s a lot of inflation, it means prices are going up, up, up. If they keep going up, people will eventually stop taking this whole “money” thing seriously. "Bread cost me $3 last week, and now it costs $500? Psshh, I might as well use my $3 for toilet paper."

A little inflation is all right, since that’s just the economy growing. Growth means more money in the system, which means more demand for things, which raises prices.

Central banks use price level targeting as a way to keep the economy growing, but at a stable pace; nobody wants hyperinflation. A nice inflation number? Around 2% per year. If inflation falls below that, the Fed might lower interest rates, encouraging borrowing and spending. If inflation is above 2%, the Fed might raise interest rates, making stuff more expensive so that the price level stops rising so much.

Targeting prices to affect inflation (rather than targeting inflation directly) is easier for central banks, because they can see various baskets of goods changing prices. But that also makes it riskier, since if they’re focusing on one basket of goods and not others, they could end up amplifying the business cycle rather than tempering it. It can get politically messy too, depending on which basket of goods you decide to use for price level targeting. For these reasons, price level targeting is kind of...out of vogue.

See: Price Level.

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Econ: What is General Price Level?4 Views

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And finance Allah shmoop What is general price level You

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go to the sort of by your usual weekly staples

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canned chili caramel dip frozen bananas pickled kiwi Ryan's and

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replacement anima tubes Every week you buy the same things

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weekend week out Your grocery cart has the same four

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items It's been like this for years Same stuff every

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week You're a creature of habit And yes you have

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those digestive problems that you might want to check out

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But that's for another video OK overtime prices for the

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individual items move in all different directions Prices for some

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of the items might go up while prices for others

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might go down even when everything moves in the same

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direction While the prices don't change at the same rate

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some see big jumps in price Some barely see moves

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at all For instance in the past year the price

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of a can of chili rose from a buck forty

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six to a buck forty nine an increase of about

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two percent No big deal however Pickled kiwi rinds have

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jumped to seven dollars Sixty nine cents from seven dollars

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nine cents an increase of nearly eight and a half

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percent Yeah much bigger deal Meanwhile the price of anima

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tube's actually fell during the year leaking or dipping to

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six dollars forty nine cents from six seventy four Well

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those air individual price levels But what about general price

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levels Will the general price level is a measure of

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prices across an entire system not just the direction of

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a price the direction of all prices You know general

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prices Right So this week all the items in your

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grocery cart cost you twenty dollars Two cents That's your

01:34

general price level If you want to make an economic

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indicator out of it well call it your personal general

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price indicator or PGP I once you know the general

01:43

price level while you contract overall price changes over time

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So a year ago the four items that you buy

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every week totaled nineteen dollars Forty two cents This year

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Twenty dollars two cents Your PGP I rose three point

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one percent from last year And there's a map new

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minus old overalls that you get that percent growth formula

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thinking well In real life he's general price levels are

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used to track inflation or deflation though well it doesn't

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happen all that often deflating things People like to rattle

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off inflation stats but it's actually a tricky thing to

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really track Honestly you're fairly er accurately in a complex

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economy prices for various products are moving in different directions

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all the time and a different rates all the time

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Combining all this action into a single stat well is

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extremely complicated There are a lot of competing indicators that

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measure the general price levels in the overall economy The

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most high profile of these is the Consumer Price index

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or CP I It works like the total price is

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for your weekly grocery basket except that the CP I

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includes a big basket like a basket with a representative

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sample off of all the stuff people by at least

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all the stuff that CPS measures And it's like thousands

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of things Your personal consumer price index may include just

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those four items that you buy every week You know

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the basket where one in four of the items are

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enema tube But the C P I R consumer price

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index is a lot broader thousands of items that people

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die all the time or in that index So yeah

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enema to prices make up well hopefully far less than 00:03:13.87 --> [endTime] twenty five percent of that index What

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