Why does the Fed aim for 2 percent
inflation over time?
The Federal
Reserve System (Fed) judges that inflation at the rate of 2 percent (as
measured by the annual change in the price index for personal consumption
expenditures (PCE) is most consistent over the longest run with the Fed’s
mandate for price stability and maximum employment.
But
what does this targeted 2 percent inflation mean for the lifetime of the US
dollar?
Statistically,
the targeted 2 percent inflation works out as follows:
So the
consequence of the targeted 2 percent inflation is that the lifetime of the US
dollar ends after 35 year, if the target is realized. Then there is no
purchasing power left.
How
about the other dominant central banks?
For the
European Central Bank (ECB) the price stability is defined as a year-on-year
increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of
below 2 percent.
The Bank of
Japan (BoJ) set the price stability target at 2 percent in terms of the
year-on-year rate of change in the consumer price index (CPI) in January 2013.
For the
Bank of England (BoE) the price stability is defined by the inflation target of
2 percent, also based on the CPI.
And:
People’s
Bank of China around
3 %
Bank
of Russia 4
%
Swiss
National Bank <
2 %
Central
Bank of Republic
of Turkey 5 % +/- 2 %
So the
consequence of the targeted inflation is that the lifetime of the most dominant
world currencies ends after 35 years, if the target is realized.
Then there is
no purchasing power left.
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Nico Simons is a Dutch investigative journalist on financial issues, especially monetary issues. His articles are regularly published on MoneyInsights.org.
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The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
