What Is The Optimal Rate Of Inflation?

Most nations seek rapid economic growth, full employment, and price stability. But just what is meant by price stability? Most macroeconomic point to the advantage of relatively low and stable inflation. In the 1991 to 1996 period in the United States, for example consumer price inflation was stable at about 3 percent per years. During this period output and price growth were relatively predictable, leading to a stable macroeconomic environment in the United States

Some today argue that policy should go further and aim for absolutely stable prices or zero inflation. Stanford economist Robert Hall and Federal governor W. Lee Hoskins point to the value of having a predictable level of future prices when people make their investment decisions. A bill recently introduced by Senator Connie Mack, chairman of the Joint Economic Committee, directs the Federal Reserve to pursue stable prices because price stability maintains the highest possible levels of productivity, real incomes, living standards, employment, and global competitiveness.

Many macroeconomists demur. They point out that, while a zero inflation target might be sensible in an ideal economy we do not live in a frictionless system.