Planet Money Two Indicators: The 2% inflation target
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Jan 13, 2023 Adrian Ma, host of The Indicator and contributing voice to the sea shanty segment, dives deep into the 2% inflation target set by the Federal Reserve. He unpacks its intriguing origins, tied to a New Zealand economist, and explores the ongoing debate about its relevance today. The conversation cleverly uses nautical metaphors to illustrate inflation’s rising tides, while also touching on the impact of fluctuating prices on everyday items. With a mix of humor and insightful analysis, Ma sheds light on the complexities of economic stability.
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Origin of the 2% Target
- The 2% inflation target originated in New Zealand in the 1980s.
- Economist Arthur Grimes suggested a target range of 0-2% to combat high inflation.
2% Target Adoption
- The 2% target became popular among central banks worldwide, including the US Federal Reserve.
- It acted as a useful tool for managing inflation expectations.
Benefits and Drawbacks of 2%
- When inflation is at 2%, it's low enough that people generally don't worry about it.
- Higher inflation targets, like 3% or 4%, could give the Fed more flexibility during recessions.