The US Federal Reserve and the European Central Bank set a 2% inflation target to prevent deflation, maintain economic stability, and anchor public expectations.
Why 2 Percent?
- Deflation prevention: A 0% target risks sliding into harmful deflation where people stop buying things waiting for lower prices.
- Safety buffer: It gives central banks room to cut interest rates during a downturn without hitting zero.
- Measurement bias: Price indexes slightly overestimate inflation due to unmeasured quality improvements in goods.
Economic Benefits
- Stable planning: Businesses and workers can set realistic prices and wages.
- Credibility: Clear goals hold central banks accountable and keep long-term inflation stable.