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Should central banks target 2% inflation? Show more Show less
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Inflation targeting went from being a radical view to the new orthodoxy of central banking. After most central banks have adopted it in practice, they have almost all converged on 2% as the right inflation target, although some emerging market central banks have higher inflation targets.

No, even targeting 2% inflation does not lead to monetary stability Show more Show less

At 2% inflation, money will lose half its value in 25 years. Genuine price stability requires a target of 0% inflation.
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Long-term inflation at 2% can cause an economic downturn

Lowering inflation, instead of keeping it at 2%, would be ideal in curbing the negative effects that inflation itself could have on the global economy.
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The Argument

Inflation at 2% can have serious negative effects on an economy in the long run for several key reasons. People fear the instability that comes along with higher inflation because their purchasing power and standard of living decrease as inflation grows higher and higher. Those wage earners with largely fixed rate of pay (like pensioners) also have a difficult time adjusting to the increasing prices that come along with higher inflation, making it difficult for them to catch up with their local AND federal economic circumstances. According to the Bank of Canada, "Business people, workers, and investors respond to rising inflation by pushing up prices, wages, and interest rates to protect themselves. This can lead to a 'vicious circle' of rising inflation."[1] The costs of constant inflation at 2% greatly outweigh the potential benefits, which is why economies should aim toward 0% inflation rather than a steady 2%.

Counter arguments

Though high inflation can cause instability over time, a steady 2% rate can toe a good balance between low and high inflation. Without inflation, an economy would have no room to grow in the various technological markets that boost its overall value on a global scale, and the level of instability that has been proven to result from this can be catastrophic in both the short- and long-term economic output. At a steady 2%, the future is much more predictable and, therefore, more manageable for consumers and investors alike. 2% is a much better alternative to 0%, and though inflation could potentially decrease to 1.5% to boost the individual's purchasing power, there is great strength and much-needed foundation in 2%

Premises

[P1] Higher inflation (which is currently steady at 2%) causes a steady rise in prices and wages over time. [P2] Higher inflation causes economic instability among fixed wage workers and a marked decrease in purchasing power for the average consumer over time. [P3] People should aim more toward 0% than 2% inflation.

Rejecting the premises

[Rejecting P2] 2% creates more overall stability in the long-term because 0% causes a huge imbalance in a national economic landscape. [Rejecting P3] 2% should be steadily maintained, not 0%.

References

  1. https://www.bankofcanada.ca/wp-content/uploads/2010/11/benefits_low_inflation.pdf
This page was last edited on Wednesday, 22 Jul 2020 at 16:44 UTC