The 2% inflation target is key to the Federal Reserve’s vision for stable prices in the U.S. economy, according to the Federal Reserve Bank of St. Louis.
Canada, Australia, Japan and Israel are among the many economies that include 2% in their inflation rate targets, according to the International Monetary Fund.
But, “the 2% inflation target, it’s relatively arbitrary,” Josh Bivens, director of research at the Economic Policy Institute, told CNBC.
Then, where exactly did this 2% inflation rate dream originate?
“You would think that ... maybe somewhere in the Bible, God says he wants 2% inflation,” Laurence Ball, professor of economics at Johns Hopkins University and a consultant for the International Monetary Fund, quipped to CNBC.
“It was invented, oddly, in New Zealand,” said Ball.
So, CNBC called up some New Zealand economists.
“We led the way in inflation targeting,” Arthur Grimes, professor of wellbeing and public policy at Victoria University, told CNBC.
In the late 1980s, New Zealand was facing incredibly high inflation when freshly minted Ph.D. economist Grimes started his work at the central bank, which at the time was not independent from the government.
“We were saying, ‘OK, if we have independence, what should we target? Interest rates or the money supply?’” Grimes said.
“And I just one day, I said, ‘Well, actually, what are we trying to achieve? We’re trying to achieve price stability. Why don’t we just have an inflation target?’”