Long-term inflation at 2% can cause an economic downturn

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. The effect is cumulative rather than one-off, which is what makes a rate described as low a long-run problem: a figure that appears small in any single year compounds across all the years a person earns, saves and retires through, so the same nominal sum buys steadily less over the course of a life. 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. The difficulty is structural rather than a matter of budgeting. Where an income is fixed by contract or by entitlement it does not move with prices automatically, so the gap opens before any adjustment can be sought and the person absorbs the loss in the interval — and those least able to renegotiate what they receive are the ones most exposed to it. 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." The mechanism described there is self-reinforcing. Each party's defensive response becomes an input to somebody else's costs, so behaviour that is entirely rational for any individual actor is what sustains the problem for everyone, and once an expectation of rising prices is established it is built into the next round of decisions before the prices themselves have moved. 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%. A target of zero, on this argument, removes the expectation itself rather than attempting to hold it steady at a level assumed to be manageable.

Premises

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%

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%.