Economist Mike Walden: Re-thinking the 2% Inflation Target

This is Mary Walden with economist MW, welcoming you to the economic perspective.   Today’s program looks at re-thinking the 2% inflation target. Mike, the Federal Reserve has long set a preferred inflation rate of 2%.   But I understand that at a recent meeting of central bankers from all around the world, that target has come into question.  Is there anything special about a 2% inflation rate?

 

Mike:  Summary Answer

  1. Based on the idea that measured inflation is overstated – so 2% measured could be 0% actual
  2. But also a debate about the pros and cons of higher and lower inflation
  3. Higher – easier for people and government to manage debt – since debt has a fixed payment, and higher inflation reduces value of fixed debt payments
  4. But there are benefits of lower inflation – easier to see real price changes; also easier for people who don’t see their income rise with inflation
  5. No conclusion reached, but some say they think Fed will tolerate more than 2%

And I’m Mary Walden for the Economic Perspective, an NC State Extension program from the Department of Agricultural and Resource Economics.