It has been holy writ among central banks that the goal of monetary policy should be to achieve a 2% rate of inflation. Federal Reserve boss Jerome Powell, for example, says he will fight the current inflation until it gets down to 2%. But this episode of What’s Ahead exposes how flawed and destructive this policy has been.
There are the obvious problems, ranging from the numerous ways to measure the cost of living to how, exactly, a central bank can influence a particular index. More fundamentally, the metric ignores economic barriers to growth, such as high taxes, suffocating regulations, government overspending—and an unstable currency. The link between a price index and the performance of an economy is historically tenuous.
And the 2% rate? It was picked out of thin air by a New Zealand central banker.