The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment. Over time, a higher inflation rate would reduce the public’s ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling–a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term.
So to the brilliant banksters up there at the Federal Reserve, losing 2% per year is the same as not losing anything, i.e., stability. A zero interest rate as is currently in place discourages savings -- at least, that's the theory. The problem is, as Japan has seen over the last twenty years, older people seeking to retire will try to save MORE to cover the cost of projected inflation. Lost decades are the best-case scenario.
It is true that improvements in productivity over the last fifty years or so have masked the worst effects of inflation, but productivity appears to be stagnating. Barring new technological developments with the kind of impact on our ability to create and produce that we have seen from computers, the internet, and mobile communications -- which is possible -- we could easily be facing a decline in productivity as more skilled workers age and leave the work force.
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