Why do central banks target low and stable inflation?

Central banks target low and stable inflation to maintain purchasing power and promote economic stability and growth.

Central banks, such as the Bank of England or the European Central Bank, play a crucial role in managing a country's economy. One of their primary responsibilities is to control inflation, which is the rate at which the general level of prices for goods and services is rising. They aim for a low and stable inflation rate, typically around 2%, to ensure a healthy economy.

Low and stable inflation is desirable for several reasons. Firstly, it helps to maintain the purchasing power of money. Inflation erodes the value of money; the higher the inflation, the less you can buy with the same amount of money. By keeping inflation low, central banks help to preserve the value of money, which is essential for individuals and businesses to plan for the future.

Secondly, low and stable inflation promotes economic stability. High inflation can lead to economic uncertainty, as it makes it more difficult for businesses to plan for the future and can lead to less investment. On the other hand, deflation (negative inflation) can also be harmful, as it can lead to a vicious cycle of falling prices and reduced spending, potentially leading to a recession. By targeting a low and stable inflation rate, central banks aim to avoid these extremes and promote a stable economic environment.

Finally, low and stable inflation can help to promote economic growth. When inflation is low and stable, it can encourage spending and investment, as individuals and businesses have more confidence in the future value of money. This can lead to increased economic activity and growth.

In order to achieve their inflation targets, central banks use various tools, such as setting interest rates and controlling the money supply. By carefully managing these tools, they aim to steer the economy towards their inflation target, helping to promote economic stability and growth.