By Veronika Dolar, SUNY Old Westbury
What’s so special about the number 2? Quite a lot, if you’re a central banker – and that number is followed by a percent sign.
That’s been the de facto or official target inflation rate for the Federal Reserve, the European Central Bank and many other similar institutions since at least the 1990s.
Inflation in the U.S. has been on the rise in recent months. The Fed and its counterparts have had to increase interest rates to bring them down to their target levels.
An economist who studies the movements of key economic indicators such as inflation, I know that stable and low inflation is crucial for a functioning economy. But why is the target 2%? Why not 3%? Or even zero?
Inflation on the rise
At 9.1% per year, the U.S. inflation rate reached its peak in July 2022. The last time consumer prices were rising this fast was back in 1981 – over 40 years ago.
Since March 2022 the Fed has actively tried to reduce inflation. In order to do this, the Fed has been hiking its benchmark borrowing rate – from effectively 0% back in March 2022 to the current range of 3.75% to 4%. And it’s expected to lift interest rates another 0.5…