Should central banks target 2% inflation?

Low, stable inflation helps the economy operate efficiently

Question: Should central banks target 2% inflation?
Position1 of 3›: Yes, inflation targeting provides monetary stability
Argument: Low, stable inflation helps the economy operate efficiently

When inflation is low and stable, individuals can hold money without having to worry that high inflation will rapidly erode their purchasing power.

The argument

Low, stable inflation provides individuals with more monetary stability and purchasing power. It also helps the economy move towards stability, thereby encouraging individuals to save and invest. According to economist Richard G. Anderson, price stability is "a prerequisite for attaining maximum sustainable economic growth." Having low, stable inflation reduces economic volatility, and its effects are experienced in the United States and abroad. With economic growth and a reduction in economic volatility, businesses and households can make more accurate longer-run financial decisions about borrowing, lending, saving, and investing. Anderson also claims that sustained low inflation is necessary for an economy to achieve long-run economic growth. By having low, stable inflation, longer-term interest rates are more likely to be moderate.

Premises

[P1]Low, stable inflation gives individuals monetary stability and purchasing power and reduces economic volatility, letting households and businesses make accurate long-run financial decisions. [P2] Economist Richard G. Anderson argues price stability is a prerequisite for maximum sustainable growth and keeps longer-term interest rates moderate. [C] Because low, stable inflation helps the economy operate efficiently, inflation targeting provides monetary stability.

Counter-arguments

The argument supports the value of low, stable inflation without supporting the target actually under discussion. Nothing in it explains why the figure should be 2% rather than 1% or 4%, or why an inflation rate rather than some other nominal variable should be the object of policy. The number was not derived from theory: it entered central banking through New Zealand's initial price-stability legislation and was copied internationally. Anderson's claim, taken literally, points somewhere else again — if price stability is a prerequisite for maximum sustainable growth, that is an argument for zero inflation, which a 2% target deliberately does not deliver, so the authority cited does not support the position it is enlisted for. The argument also assumes the target delivers what it promises. Critics observe that major central banks undershot 2% for years after 2008 despite extraordinary measures, and then overshot it substantially, which suggests the target expresses an intention more than a capability — the contention of the second sibling position. A met target is compatible with instability accumulating elsewhere, too: consumer prices were stable through the years in which housing and credit imbalances built up before 2008, which is the basis of the remaining sibling position that a nominal GDP path would better capture what stabilisation is for. And the argument's own mechanism cuts against it at the margin, since an inflation rate low enough to keep long-term interest rates moderate also leaves little room to cut them in a downturn before reaching zero — the constraint that has prompted proposals to raise the target rather than defend it.

Rejecting the premises

[Rejecting P1] Low, stable inflation may aid planning, saving and investment, but nothing here explains why the target should be 2% rather than another figure, or why inflation rather than another nominal variable should be targeted. [Rejecting P2] Read literally, the claim that price stability is a prerequisite for maximum sustainable growth argues for zero inflation, which a 2% target deliberately does not deliver — and stable consumer prices coexisted with the credit and housing imbalances that preceded 2008, so meeting the target does not secure stability.