# Why is an inflation rate of 2% optimal? [duplicate]

Learning from different sources I got the impression that the European Central Bank targets at a inflation rate of 2% (not sure along which time scale actually).

Can it be explained by general principles why a (long-term) inflation rate of 2% seems optimal?

Or does it depend on the current economic situation, and in some scenarios an inflation rate of 0%, 1%, or even 5% or deflation would be optimal (in the short or mid run)? But in the long run always 2%?

## 1 Answer

In an article in the Times, Jon Moulton stated:

"The Bank [of England] has had this [2%] inflation target for more than a decade yet it lacks any theoretical basis."

EDIT: Just in case you are interested, I have a theory about optimal inflation. If you wish money to be neutral - i.e. be a Veil over Barter then you would like money to behave as closely as possible to ordinary "stuff" that gets bought and sold. One property that the bulk of goods have is that they decay over time, i.e. they rot, rust, become obsolete etc etc. If you consider the average decay rate of "stuff" to be X% then inflation should be such that money loses its value at a rate of X% too. I'd say that the decay rate of "stuff" is generally greater than 2%, my feeling is that it is more like 5% or so.