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Most major central banks ā from the US Federal Reserve to the European Central Bank ā have one magic number in mind when it comes to inflation: 2%.
But why 2%? What makes that number so special?
š The Goldilocks Zone of Inflation
A little inflation is actually healthy for an economy. Central banks aim for 2% because:
ā
Itās high enough to avoid deflation ā thatās when prices fall, which might sound nice but can actually freeze the economy. When people expect prices to keep dropping, they stop spending, businesses stop investing, and job losses follow.
ā
Itās low enough that your money doesnāt lose value too quickly. You probably wonāt notice 2% inflation day to day ā but over time, it adds up just enough to encourage people to spend and invest rather than hoard cash.
š¬ The Problem? They Rarely Hit It
In reality, central banks struggle to stick to that 2% target.
ā” In good times, inflation can spiral above 2%, making everything from food to fuel painfully expensive.
ā” In bad times, inflation can slump below target, risking deflation and economic stagnation.
š Either way, your money steadily loses value ā often much faster than the official 2%.
š Danchima Media Insight
> The 2% inflation target might sound like a technical detail, but it affects everything: your savings, your mortgage, your grocery bill. And as history shows, keeping inflation in that āGoldilocks zoneā is far easier said than done.
