Is there some sort of mathematical reason behind this goal? Does 3% have some sort of long-term effects such that it becomes uncontrollable or something?
It seems like, inflation or not, places are just as busy (restaurants, Target/Wal-Mart, Costco, etc…).
In: Economics
Inflation is a positive feedback loop. Inflation causes inflation – prices go up, employees demand higher wages, so prices go up. Round and round it goes. The higher the inflation you accept, the more danger there is of an upward spiral that gets out of control. Deflation is even worse, and is also a self causing feedback loop, so you don’t target 0%, but lower is safer. (Deflation: prices go down, so sellers have less cash so they pay less, so prices go down, then people get laid off, and then no one has money so prices drop again, round and round she goes.)
The simple fact is – change is bad for the economy. Balancing it is difficult – all our tools for maintaining a balance are blunt instruments. For example – you raise interest rates to control the money supply so prices will go down or stop rising – but raising interest rates also increases everyone’s housing costs which causes related prices to go up.
The central bank’s objective is always to smooth out the economy – slow changes over long periods of time is what you want to see. Sudden changes make the economy unstable (in both directions) and unstable things always eventually crash.
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