First, low and stable inflation enables firms and individuals to have confidence in the value of money and to read price signals clearly, helping them to make sound long-term economic decisions. Second, when inflation is contained, and the economy is running close to capacity, we can deal more effectively with economic shocks.
Resources can more easily be reallocated from sectors where demand is relatively weak to sectors where demand is relatively strong. This is especially important at times, like now, when there are large movements in relative prices—that is, in the prices of some goods, such as energy products, relative to other prices.