But isn’t that the whole point? 2pc is admittedly a somewhat arbitrary figure; so much so that nobody can quite remember why it was chosen in preference to say 1pc or 3pc. Both Britain and the US went through much of the 1980s with inflation at significantly above 2pc, and it didn’t seem to do them much harm.
All the same, there is a certain logic to 2pc. Inflation per se is bad. In a perfect world you’d have no inflation at all. Everyone would have a much better understanding of where they stood if that was the case. But this is probably unrealistic.
2pc is about productivity increases. Or, in the good times in a well functioning economy it is.
Leave aside the people on fixed incomes getting shafted by inflation bit, pensions only have 2% inflation upgrades and all that. Think about the larger picture.
People are very, very, resistant to falling nominal incomes. That’s one of the deflation worries. Falling real incomes not so much.
Now think of technological change, productivity increases – they’re the same thing. This would, we hope, run at 1 to 3% per annum. It did for most of the past century after all.
OK, that means that relative prices of things are going to change – that’s also what rising productivity, tech change, mean. So too therefore will the wages on offer to people working in specific jobs and industries. And we want certain wages to decline relative to certain others – the lower productivity jobs and occupations to pay less than the higher prod ones.
But this then meets that hatred – and it is, it’s a visceral hatred – of falling nominal incomes. But an inflation rate around and about the rate of productivity increases allows changes in real incomes of about the right size while keeping nominal wages at worst static.
There is actually as reason to have 2%. It’s grease that allows the other changes with the minimum of fuss.