Why would anyone want prices to rise?
- Most big central banks aim for prices to rise about 2% a year, on purpose. It's in their official targets.
- The number wasn't found in nature. New Zealand set it in 1990, and the rest of the world copied it.
- And 2% is the best case. When inflation misses the target, it usually misses high.
Every time your groceries get a little more expensive, it feels like something went wrong. Mostly, it didn't. A slow, steady rise in prices is the plan. It's meant to be good for the economy. Whether it's good for your savings is a different question.
What $100 buys if prices rise 2% a year
Where 2% came from
In 1990, New Zealand became the first country to give its central bank a formal inflation target: keep prices rising between 0% and 2% a year. Inflation there was running at 7.6% at the time. It worked, other central banks came to study it, and 2% slowly became the world's default.
"I just announced it was gonna be 2%, and it sort of stuck."Roger Douglas, former New Zealand finance minister
That doesn't make the number silly. But the most important number in your financial life was a policy choice, not a law of nature.
Why they do it
Think of walking. You don't walk standing perfectly straight. You lean forward a little, and each step catches you. Central banks see the economy the same way: a slight lean forward keeps it moving.
The mainstream view goes like this. If prices were expected to fall, people and companies might wait to buy, spending would drop, and jobs would be cut. A steady 2% is meant to keep money moving, give central banks room to cut interest rates in a crisis, and make debts a little lighter every year, including government debt.
Not everyone agrees. Laptops and phones get cheaper every year, and people still buy one when they need it. Some economists argue that mild, steady price declines would be perfectly livable. Since no major economy has tried it on purpose, nobody can prove either side.
2% is the best case
2% is a target, not a promise. In 2022, inflation hit 9.1% in the US and 10.6% in the euro area. When you hear "only 4%", remember that every extra point makes your money melt faster.
Why you're the one paying
Someone carries that lean forward. Mostly, it's people holding cash, or savings accounts that pay less than inflation.
Say your bank offers 1.5% a year. That sounds like a reward. But if prices rise 2%, your money still buys less every year. It just melts a little slower than cash in a shoebox.
Debts getting lighter has a flip side: your savings get lighter too. Nobody is doing this to you personally. The system is built to protect the economy as a whole, and it mostly does. Protecting your savings is left to you.
Isn't this a bit unfair?
Partly, yes. People who already own houses, shares or businesses tend to keep up with rising prices. People who mostly have a paycheck and a savings account have to work to stay level. That's not a conspiracy. It's how the rules work, and it's why understanding them matters more than complaining about them.