by Nico Simons, Sprott Money:
Why does the Fed aim for 2 percent inflation over time?
The Federal Reserve System (Fed) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures (PCE) is most consistent over the longest run with the Fed’s mandate for price stability and maximum employment.
But what does this targeted 2 percent inflation mean for the lifetime of the US dollar?
Statistically, the targeted 2 percent inflation works out as follows:
So the consequence of the targeted 2 percent inflation is that the lifetime of the US dollar ends after 35 year, if the target is realized. Then there is no purchasing power left.
How about the other dominant central banks?
For the European Central Bank (ECB) the price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2 percent.
The Bank of Japan (BoJ) set the price stability target at 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) in January 2013.
For the Bank of England (BoE) the price stability is defined by the inflation target of 2 percent, also based on the CPI.
People’s Bank of China around 3 %
Bank of Russia 4 %
Swiss National Bank < 2 %
Central Bank of Republic of Turkey 5 % +/- 2 %
So the consequence of the targeted inflation is that the lifetime of the most dominant world currencies ends after 35 years, if the target is realized.
Then there is no purchasing power left.
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