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Central Banks’ 2% Inflation Target Is Not the Finish Line

When firms and workers pay close attention to inflation, they adjust their own price and wage demands more frequently – a response that can perpetuate inflation across the economy. Given this, reaching central banks’ 2% target is not enough; policymakers need to get the economy to a place where agents forget about inflation altogether.

BRUSSELS/MILAN – Sentiment in financial markets has undergone a sharp reversal in early 2024. After more than a year of aggressive interest-rate hikes by the US Federal Reserve and the European Central Bank, talk has turned to the question of when – not if – central banks will lower rates. After all, inflation in the United States and the eurozone has fallen almost as quickly as it rose, and is now near central banks’ 2% target.