Revisiting the Debate: What is the Ideal Rate of Inflation?

The 2% inflation target is a key part of the Federal Reserve’s vision for stable prices in the U.S. economy, as well as the target of many other central banks around the world. But some economists have argued that the 2% target is relatively arbitrary and that the economy could function just as well with a higher rate.[0]

In 2007, some economists wrote a letter to the Fed arguing for a higher ceiling, saying “there’s no evidence that 3% or 4% inflation does substantial damage relative to 2% inflation.”[1] Laurence Ball, professor of economics at Johns Hopkins University and one of the signatories of the letter, concluded that “the 2% inflation target is relatively arbitrary.”

Despite calls for a higher inflation rate, the Fed is unlikely to change its 2% target in the current hiking cycle, as it may be seen as caving to investor demands for lower rates.[1] But the question of what is the appropriate rate of inflation will remain an issue for future generations of central bankers.

On the one hand, a higher inflation rate could give the central bank more room to lower interest rates and stimulate the economy.[2] Conversely, if inflation is too high, it can reduce consumers’ purchasing power and create uncertainty about how to plan for the future.[2]

The 2% inflation target may be the benchmark for now, but it will be up to future generations of central bankers to weigh the pros and cons and decide on the ideal rate of inflation.

0. “The curious history of the Federal Reserve’s 2% inflation targeting, explained” Forex Factory, 20 Feb. 2023,

1. “CNBC Daily Open: The Fed wants inflation at 2%. But the economy might be fine with higher inflation” CNBC, 21 Feb. 2023,

2. “What Would Happen If the Fed Raised Its Inflation Target?” Chicago Booth Review, 18 Nov. 2021,