Why 2% inflation is the right objective for monetary policy But if our aim is to avoid both excessive inflation and deflation, why do we not set a 0% inflation objective? The answer is that the rate of inflation we aim for and our ability to stabilise prices are intertwined.
Or put another way, a steady state inflation rate of 2% inflation is itself a shock absorber which allows us to deliver stability. There are several reasons for this, but let me highlight two in particular. First, a moderately positive level of inflation facilitates the adjustment of relative prices, which helps prevent short-term shocks from morphing into longer-lasting disturbances.