Why does the federal reserve target for 2% inflation instead of none?

Answer 1

Industry works better when prices are gradually rising, giving consumers an incentive to buy now. Zero inflation can destabilize things, and quickly turn into deflation.

Answer 2

There has to be a small amount of inflation for the economy to grow, create jobs and revenue. Economics is not precise. If they targeted zero there would be a chance of causing deflation. This would severely slow the economy. It would result in less jobs, production, revenue.

Answer 3

Very pertinent and interesting question.
It is almost impossible for any market economy to achieve a zero inflation if the economy has to grow on a sustained basis. The demand for goods rise with population growth, wage revisions, increment in salary due to promotion, higher scarcity of natural raw materials like petroleum oil, coal, etc. Besides there are incidence of supply shocks due to bad harvests following heavy floods, dought, earth quakes as also delays in the arrival of raw materials and final goods from dstant locations and foreign countries due to port stikes, shortage of ships/ trucks, etc. These demand supply mimatches are almost inevitable every year and cause prices to rise more than the fall in prices of some commodities due to technological efficiency gains and market competition. So, a minimum rate of inflation is inevitable. If the Fed tries to depress prices further, in most industries there may be no incentive to produce and a depressn can start as investments in fresh capacity may not be forthcoming adequately to sustain economic growth in future. Therefore Fed targets a low rate of 2% as the inflation trget.
If as consumers were to demand a target, we would have asked for a negative rate of inflation target: prices should fall. But such goals of zero or negative inflation rates are unrealistic and even if the Fed tried to achieve such targets, it may hurt investments and put the economy into a depression. In compand economies, they may fix targets of zero infltion because in those economies the prices are fixed arbitraily by the govt. and they often maintain same lkevel of prices over years incrring losss that hurt their growth rates sooner or later.
Like we cannot have zero rate of unemployment due to chances of frictional unemployment, we can ensure zero inflation rate due to inevitable excess demand in certain products during any year and because zero price increase may make production of some good uneconomic anf investments n fresh capacity creation unattractive.
How I wish prices remained at the same level all the time despite the uncertainties over demand and supply factors all around.

Answer 4

It is based on loanable funds supply theory and history. 0% inflation would not provide enough of an incentive for some likely investors (suppliers) to enter the loanable funds / investment funds market. Also, periods of extremely low inflation have been characterized by sluggish economic growth or recession, which seems to support the theory.

Answer 5

Inflation is on-going. It never rest. Inflation starts at the top with our Government and trickles down to the individual on a local level.

Answer 6

actually, it's to make people lose money, generally speaking, most people have less than 2% interest rates in their bank savings accounts, unless you have a very large heap of money in there. So although your numbers increase in your account, it is not rising fast enough to keep up with inflation. Your buying power will decrease over time. Only if you are incredibly rich do you get richer, and the poor will get poorer.