Why Central banks aim for 2% inflation

The economy has two main objectives....
1.) maximize employment ⠀⠀✔⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀
2.) keep prices in the economy relatively stable. ✔

Inflatio relates most closely to the 2nd objective. The Fed says that an inflation rate much greater than 2% would, over time, reduce the ability of people and companies to make long-term economic and financial decisions. ⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀

The uncertain environment would likely, effectively, cause people and companies to spend less money – and the economy would suffer. ⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀
On the other hand, inflation that’s well below 2% suggests the economy is doing poorly: people aren’t getting pay raises and there’s not enough demand in the economy for companies to raise prices, even modestly.😱 ⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀⠀

So, 2% is judged to be just enough inflation to keep the economy from falling into deflation while not being so much that changes in prices become de-stabilizing and harmful.

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