# What is the rationale for setting a 2% target rate for inflation

I have what I think is a simple question, but just like 'how do you balance a checkbook' they don't teach it in school.

Is there any scientific proof that 2%-3% target inflation rate is ideal?

and that's a different question, it assumes 2%-3% inflation.

My question is simple: what is the rationale for assuming that any inflation at all is a good idea.

From what I understand, some amount of inflation:

1. makes the money you pay back your 30 year mortgage with (and any other long term loans) cheaper, so you're not really paying back your whole loan in the same full value money in which you borrowed it. yay, score one for the little guy.

2. means that unless you get an inflation-rate raise every year, you are taking a paycut. minus one for the little guy. This has the advantage of making it easy for every employer to pay their workforce less every year, by simply not giving everybody an inflation rate raise.

3. makes things appear to depreciate more slowly. Let me see if I get this right: A \$1,000 car devalues as soon as you drive it off the lot, so in 2 years it's worth a smaller dollar value because it is a slightly worn car (let's say \$800 in original-purchase-dollars value) but because of inflation it's worth \\$820 in 2-years-after-purchase money because each dollar is worth a little less so you need more of them to express the same actual value.

I'm sure there are lots of other side effects, but those are the big ones that stand out to me.

But my actual question is: why at all?

Imagine a world where a gallon of milk always costs the same amount (varying for supply demand problems, in which case the price wouldn't just slow its increase when supply improved, but would actually go down to its original actual-cost price.)

Imagine you received the same compensation for the same work year after year, and that was okay because goods and services cost roughly the same thing every year and you could afford to exist in this static, status-quo world.

I've read about the 2% inflation target for decades now but have yet to find an explanation why it is assumed to be good.

I sometimes think it makes the humans feel better by getting a 'raise' every year and having a paycheck with a bigger number in it every year. Like giving a kid a present at Christmas, it makes you feel better to have more stuff, bigger numbers. That's why games have scores and higher scores are assumed to be better. That seems somewhat reasonable, but I have a little more faith in at least some of humanity that that doesn't make the whole inflation enterprise justifiable.

I realize inflation is natural and will occur as a result of supply and demand problems like what we're seeing today (at the end of 2021 for you future readers.) What I don't understand is where the assumption that an above-zero inflation target is the best deal overall.

Maybe a 2% drop would be better. Maybe I want the value of all my saved dollars in the bank to be worth more so I can retire more easily and not have to worry that my money will evaporate while I'm in retirement, but in fact be worth more. score one for the little guy.

So... what am I missing. What day of school was I out sick for where they explained this, because I don't get it. Maybe it really is simple, and I'm just not seeing it, but I really just don't see the value of assumed-inflation.

– 1muflon1
Dec 24, 2021 at 12:26
• well, it supplies some arguments but I think what it really says is that I covered some points, they covered some points, but what it really shows me is that: nobody really knows in entirety. we only know a few major effects that drive the rationale. The "wages are sticky" point is sadly close to my "people like higher scores" and maybe that's the most valuable point, but given the hundreds of years of economic study the fact that everybody seems to coalesce around a few points but not really have a solid deterministic answer means there probably isn't one. I guess economics is squishy.
– stu
Dec 24, 2021 at 13:18
• A target of negative 1 might cause a recession when people delay purchases because they expect lower prices. A target of zero risks being negative so it is only a little different. The recession would be a transition period. At some point consumers cannot delay purchases any longer. Dec 24, 2021 at 19:34
• Does this answer your question? Is zero inflation desirable? Dec 24, 2021 at 20:30
• partially. it seems to come down to the same thing: there's lots of apparent and not so apparently purposes to various values of inflation to be targeted, (2 or 0 or 4 or whatever), and they all have even more knock-on effects. so it answers my question in that yes there are lots of reasons for one way or another, but no, there isn't really A single answer.
– stu
Jan 3 at 19:10